DP11504 Once Bitten, Twice Shy: The Role of Inertia and Personal Experiences in Risk Taking

Author(s): Steffen Andersen, Tobin Hanspal, Kasper Meisner Nielsen
Publication Date: September 2016
Keyword(s): Experiences, financial crisis, household finance, Inertia, Risk Taking
JEL(s): D03, D14, G11
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11504

We study how inertia and personal experiences affect individual risk taking. Our research design relies on active portfolio decisions relating to inheritances to separate the effect of personal experiences from inertia, which otherwise would be observationally equivalent. Experience derives from investments in banks that defaulted following the financial crisis. We classify experiences into first-hand experiences, resulting from personal losses; second-hand experiences, from the losses of close family members; and third-hand experiences, from living in municipalities where banks defaulted. Our results demonstrate that experiences gained personally, aside from inertia or common shocks, explain substantial heterogeneity in individuals' risk taking.