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Twin picks: disentangling the determinants of risk-taking in household portfolios

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  • Calvet, Laurent-Emmanuel

    ()
    (HEC Paris)

  • Sodini, Paolo

Abstract

Author's abstract. This paper investigates the determinants of financial risk-taking and documents new facts on the financial wealth elasticity of the risky share in a panel of swedish twins. We consider a uniquely comprehensive set of demographic and financial characteristics, and use yearly twin pair fixed effects to control for genes and shared background. Consistent with cross-sectional evidence (e.g. Carroll 2002) but in contrast to recent panel studies, we document that financial wealth is the dominant characteristic driving the asset allocation of individual investors. The average financial wealth elasticity of the risky share is positive and strongly significant among participants, which suggests that individual investors have decreasing relative risk aversion. Furthermore, the financial wealth elasticity of the risky share itself is heterogeneous across investors and varies strongly with characteristics; the elasticity decreases with financial wealth and human capital, and increases with habit, residential real estate, and household size. As a consequence, the elasticity of the aggregate demand for risky assets to exogenous wealth shocks is close to, but does not coincide with, the elasticity of a representative investor with constant relative risk aversion. We confirm the robustness of our results by running time-differenced instrumental variable regressions, and by controlling for zygosity, lifestyle, mental and physical health, the intensity of communication between twins, and measures of social interactions.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 948.

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Length: 97 pages
Date of creation: 01 Jun 2011
Date of revision:
Handle: RePEc:ebg:heccah:0948

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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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Related research

Keywords: asset allocation; communication; genetics; habit formation; human capital; labor income; leverage; participation; risk-taking; social interactions; twin study;

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References

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  1. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
  2. Barnea, Amir & Cronqvist, Henrik & Siegel, Stephan, 2010. "Nature or nurture: What determines investor behavior?," Journal of Financial Economics, Elsevier, Elsevier, vol. 98(3), pages 583-604, December.
  3. David, Cesarini & Dawes, Christopher T. & Johannesson, Magnus & Lichtenstein, Paul & Wallace, Björn, 2007. "Genetic Variation in Preferences for Giving and Risk-Taking," Working Paper Series in Economics and Finance, Stockholm School of Economics 679, Stockholm School of Economics, revised 12 Jan 2009.
  4. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115(5), pages 707-747, October.
  5. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(1), pages 41-71, September.
  6. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight Or Flight? Portfolio Rebalancing by Individual Investors-super-," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(1), pages 301-348, February.
  7. David Cesarini & Magnus Johannesson & Paul Lichtenstein & Örjan Sandewall & Björn Wallace, 2010. "Genetic Variation in Financial Decision-Making," Journal of Finance, American Finance Association, American Finance Association, vol. 65(5), pages 1725-1754, October.
  8. Campbell, John & Calvert, Lauren E. & Sodini, Paolo, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," Scholarly Articles 2617031, Harvard University Department of Economics.
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Cited by:
  1. Betermier, Sebastien & Jansson, Thomas & Parlour, Christine & Walden, Johan, 2012. "Hedging labor income risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 105(3), pages 622-639.
  2. Barnea, Amir & Cronqvist, Henrik & Siegel, Stephan, 2010. "Nature or nurture: What determines investor behavior?," Journal of Financial Economics, Elsevier, Elsevier, vol. 98(3), pages 583-604, December.
  3. Zeckhauser, Richard Jay & Rand, David Gertler & Wernerfelt, Nils Christian & Garcia, Justin & Lum, Koji & Dreber-Almenberg, Anna, 2010. "Dopamine and Risk Choices in Different Domains: Findings Among Series Tournament Bridge Players," Scholarly Articles, Harvard Kennedy School of Government 4405460, Harvard Kennedy School of Government.
  4. Luigi Guiso & Paolo Sodini, 2012. "Household Finance. An Emerging Field," EIEF Working Papers Series 1204, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
  5. Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics, University of Munich, Department of Economics 11873, University of Munich, Department of Economics.
  6. Wernerfelt, Nils Christian & Rand, David Gertler & Lum, J. Koji & Zeckhauser, Richard Jay & Dreber, Anna & Garcia, Justin, 2011. "The Dopamine Receptor D4 Gene (DRD4) and Self-Reported Risk Taking in the Economic Domain," Scholarly Articles, Harvard Kennedy School of Government 5347066, Harvard Kennedy School of Government.

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