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Private Households Display Strong Aversion to Investment Risk

Author

Listed:
  • Nataliya Barasinska
  • Dorothea Schäfer
  • Andreas Stephan

Abstract

The broadest possible diversification of investments is considered an important strategy for minimizing investment risk. Most households in Germany do distribute their financial assets over several types of investment. However, investment behavior is only partially consistent with the overall readiness for risk-taking reported by heads of households. This is demonstrated by a current empirical study based on data from the Socio-Economic Panel Study (SOEP). The probability of diversification does tend to rise according to the degree of risk aversion, yet not when it comes to a "fully diversified investment basket." With a higher fear of risk, the tendency to fill a portfolio with every kind of investment falls. Clearly, households make decisions in keeping with a principle propagated by Keynes: security and liquidity come first. The readiness to invest in riskier assets rises with the number of secure investments already in place in the portfolio.

Suggested Citation

  • Nataliya Barasinska & Dorothea Schäfer & Andreas Stephan, 2009. "Private Households Display Strong Aversion to Investment Risk," Weekly Report, DIW Berlin, German Institute for Economic Research, vol. 5(2), pages 13-18.
  • Handle: RePEc:diw:diwwrp:wr5-2
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.96058.de/diw_wr_2009-2.pdf
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    More about this item

    Keywords

    Household finances; Diversification; Financial portfolio;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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