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Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios

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  • Veronica Rappoport

    (Columbia Business School)

  • Enrichetta Ravina

    (Columbia Business School)

  • Daniel Paravisini

    (Columbia Business School)

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    Abstract

    We estimate risk aversion from the actual financial decisions of a sample of 2,168 U.S. investors participating in Lending Club, a person-to-person lending platform. We find a large degree of heterogeneity in the relative risk aversion (RRA) parameter, with an average of 2.85, and a median of 1.62. We exploit the panel dimension of the data to estimate independently the correlation between risk aversion and wealth in the cross section of investors, and the elasticity of risk aversion with respect to changes in wealth for a given investor. Using house prices as an indicator of investor wealth, we find a positive although economically small, correlation between relative risk aversion and wealth in the cross section. In contrast, exploiting the substantial decline in house prices during our sample period and employing investor fixed effect to obtain within-investor estimates, we find that the elasticity is negative and substantial (-4.18). Our estimation procedure allows us to test rationality and consistency of investor behavior.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 664.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:664

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    1. Monica Paiella & Luigi Guiso, 2004. "Risk Aversion, Wealth and Background Risk," 2004 Meeting Papers 525, Society for Economic Dynamics.
    2. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February.
    3. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
    4. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
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    6. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
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    8. Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," NBER Working Papers 8190, National Bureau of Economic Research, Inc.
    9. Levon Barseghyan & Jeffrey Prince & Joshua C. Teitelbaum, 2011. "Are Risk Preferences Stable across Contexts? Evidence from Insurance Data," American Economic Review, American Economic Association, vol. 101(2), pages 591-631, April.
    10. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-71, March.
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    14. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    15. Eckel, Catherine C. & Grossman, Philip J., 2008. "Differences in the Economic Decisions of Men and Women: Experimental Evidence," Handbook of Experimental Economics Results, Elsevier.
    16. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    17. Bruno Jullien & Bernard Salanié, 1997. "Estimating Preferences under Risk : The Case of Racetrack Bettors," Working Papers 97-39, Centre de Recherche en Economie et Statistique.
    18. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
    19. Morin, Roger A & Fernandez Suarez, Antonio, 1983. " Risk Aversion Revisited," Journal of Finance, American Finance Association, vol. 38(4), pages 1201-16, September.
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    1. Freud's class bias
      by chris dillow in Stumbling and Mumbling on 2012-11-24 13:26:15
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    Cited by:
    1. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," MPRA Paper 45203, University Library of Munich, Germany.
    2. Emi Nakamura & Dmitriy Sergeyev & Jón Steinsson, 2012. "Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence," NBER Working Papers 18128, National Bureau of Economic Research, Inc.

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