WP 2016-11 Once Bitten, Twice Shy: The Role of Inertia and Personal Experience in Risk Taking

Download Paper

Published in 2019 in Journal of Financial Economics, Volume 132, Issue 3.

AUTHORS: Steffen Andersen, Tobin Hanspal, Kasper Meisner Nielsen

ABSTRACT: We study whether personal experiences are so powerful that they make individuals actively shy away from risk. Our research design relies on portfolio decisions relating to inheritances, which alter the active decision from one of choosing to take risk to one of choosing to reduce risk. Experience derives from investments in banks that defaulted following the 2007–2009 financial crisis. We classify experiences into first-hand experiences, resulting from personal losses; second-hand experiences, from losses of family members; and third-hand experiences, from locations where banks defaulted. Our results demonstrate that experiences gained personally, not common shocks, make individuals shy away from risk.