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Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios

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  • Laurent E. Calvet
  • Paolo Sodini

Abstract

This paper investigates the determinants of financial risk-taking in a panel containing the asset holdings of Swedish twins. We measure the impact of a broad set of demographic, financial, and portfolio characteristics, and use yearly twin pair fixed effects to control for genes and shared background. We report a strong positive relation between risky asset market participation and financial wealth. Among participants, the average financial wealth elasticity of the risky share is significantly positive and estimated at 22%, which suggests that the average individual investor has 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, real estate wealth 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15859.

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Date of creation: Apr 2010
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Publication status: published as “Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios” (with P. Sodini), forthcoming in Journal of Finance.
Handle: RePEc:nbr:nberwo:15859

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  1. 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.
  2. Calvet, Laurent E. & Campbell, John Y. & Sodini, Paolo, 2006. "Down or Out: Assessing The Welfare Costs of Household Investment Mistakes," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 195, Sveriges Riksbank (Central Bank of Sweden).
  3. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2008. "Fight or Flight? Portfolio Rebalancing by Individual Investors," NBER Working Papers, National Bureau of Economic Research, Inc 14177, National Bureau of Economic Research, Inc.
  4. David Cesarini & Christopher T. Dawes & Magnus Johannesson & Paul Lichtenstein & Björn Wallace, 2009. "Genetic Variation in Preferences for Giving and Risk Taking," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(2), pages 809-842, May.
  5. 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.
  6. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers, National Bureau of Economic Research, Inc 5193, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
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Cited by:
  1. 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.
  2. 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.
  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. 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.
  5. Luigi Guiso & Paolo Sodini, 2012. "Household Finance. An Emerging Field," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 1204, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
  6. 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.

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