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

  • Daniel Paravisini
  • Veronica Rappoport
  • Enrichetta Ravina

We estimate risk aversion from the actual financial decisions of 2,168 investors in Lending Club (LC), a person-to-person lending platform. We develop a methodology that allows us to estimate risk aversion parameters from each portfolio choice. Since the same individual makes repeated investments, we are able to construct a panel of risk aversion parameters that we use to disentangle heterogeneity in attitudes towards risk from the elasticity of investor-specific risk aversion to changes in wealth. In the cross section, we find that wealthier investors are more risk averse. Using changes in house prices as a source of variation, we find that investors become more risk averse after a negative wealth shock. These preferences consistently extrapolate to other investor decisions within LC.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16063.

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Date of creation: Jun 2010
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Handle: RePEc:nbr:nberwo:16063
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