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Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending

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  • Koudijs, Peter

    (Stanford University)

  • Voth, Hans-Joachim

    (University of Zurich)

Abstract

What determines risk-bearing capacity and the amount of leverage in financial markets? Using unique archival data on collateralized lending, we show that personal experience can affect individual risk-taking and aggregate leverage. When an investor syndicate speculating in Amsterdam in 1772 went bankrupt, many lenders were exposed. In the end, none of them actually lost money. Nonetheless, only those at risk of losing money changed their behavior markedly--they lent with much higher haircuts. The rest continued as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.

Suggested Citation

  • Koudijs, Peter & Voth, Hans-Joachim, 2014. "Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending," Research Papers 3103, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3103
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    File URL: http://www.gsb.stanford.edu/faculty-research/working-papers/leverage-beliefs-personal-experience-risk-taking-margin-lending
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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