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

  • Veronica Rappoport

    (Columbia Business School)

  • Enrichetta Ravina

    (Columbia Business School)

  • Daniel Paravisini

    (Columbia Business School)

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    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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    File URL: https://economicdynamics.org/meetpapers/2010/paper_664.pdf
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    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
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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