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Wealth, Portfolio Allocations, and Risk Preference

Author

Listed:
  • Robert Östling

    (Stockholm University)

  • Erik Lindqvist

    (Stockholm School of Economics)

  • David Cesarini

    (New York University)

  • Joseph Briggs

    (New York University)

Abstract

Using an administrative data set of Swedish lottery players that were randomly assigned 500M USD, we estimate the causal effect of wealth on the share of risky assets in a household's financial portfolio. We find that $150,000 causes a 9 percentage point decrease in the average household portfolio's equity share in their financial portfolio. The effect is immediate, not explained by passive investing, and negative in all subsamples considered. A decrease in risk taking could indicate increasing relative risk aversion. However, we show that a quantitative life-cycle model with realistic income profile can replicate the estimated decrease in portfolio risk, and that caution should be used when inferring risk preference from portfolio shares.

Suggested Citation

  • Robert Östling & Erik Lindqvist & David Cesarini & Joseph Briggs, 2016. "Wealth, Portfolio Allocations, and Risk Preference," 2016 Meeting Papers 1089, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1089
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