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

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Author Info

  • 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. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
  2. Calvet, Laurent & Campbell, John Y. & Sodini, Paolo, 2006. "Down or out: assessing the welfare costs of household investment mistakes," Les Cahiers de Recherche 832, HEC Paris.
  3. Campbell, John & Calvert, Lauren E. & Sodini, Paolo, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," Scholarly Articles 2617031, Harvard University Department of Economics.
  4. David Cesarini & Magnus Johannesson & Paul Lichtenstein & Örjan Sandewall & Björn Wallace, 2010. "Genetic Variation in Financial Decision-Making," Journal of Finance, American Finance Association, vol. 65(5), pages 1725-1754, October.
  5. Barnea, Amir & Cronqvist, Henrik & Siegel, Stephan, 2010. "Nature or Nurture: What Determines Investor Behavior?," SIFR Research Report Series 72, Institute for Financial Research.
  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, vol. 124(1), pages 301-348, February.
  7. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
  8. 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 679, Stockholm School of Economics, revised 12 Jan 2009.
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Citations

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Cited by:
  1. Dreber, Anna & Rand, David G. & Wernerfelt, Nils & Garcia, Justin R. & Lum, J. Koji & Zeckhauser, Richard, 2010. "Dopamine and Risk Choices in Different Domains: Findings among Serious Tournament Bridge Players," Working Paper Series rwp10-034, Harvard University, John F. Kennedy School of Government.
  2. Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics 11873, University of Munich, Department of Economics.
  3. Barnea, Amir & Cronqvist, Henrik & Siegel, Stephan, 2010. "Nature or nurture: What determines investor behavior?," Journal of Financial Economics, Elsevier, vol. 98(3), pages 583-604, December.
  4. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  5. Dreber, Anna & Rand, David G. & Wernerfelt, Nils & Garcia, Justin R. & Lum, J. Koji & Zeckhauser, Richard, 2011. "The Dopamine Receptor D4 Gene (DRD4) and Self-Reported Risk Taking in the Economic Domain," Working Paper Series rwp11-042, Harvard University, John F. Kennedy School of Government.
  6. Betermier, Sebastien & Jansson, Thomas & Parlour, Christine & Walden, Johan, 2012. "Hedging labor income risk," Journal of Financial Economics, Elsevier, vol. 105(3), pages 622-639.

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