Exposure to Traumatic Events and Financial Risk Attitudes: The Role of Locus of Control

Major life events are widely recognized as important determinants of individuals’ risk attitudes. However, the empirical evidence does not point to a clear directional effect, with studies documenting both increases and decreases in risk taking following exposure to adverse events. This paper investigates whether individual differences in Locus of Control (LoC) – a psychological trait capturing the extent to which individuals perceive life outcomes as contingent on their own actions rather than on external forces – may help account for this heterogeneity when financial risk attitudes are considered. Using original survey data on a sample of 1,827 individuals representative of the Italian population, we investigate how exposure to different traumatic life events is associated with a series of measures of financial risk attitudes, including both incentive-compatible and self-reported measures, and whether these associations vary by individuals’ LoC and gender. Results reveal substantial heterogeneity that would remain hidden in models considering only the average association between events and risk attitudes. Our findings show that behavioral responses to traumatic experiences are to a large extent event-, measure- and gender-specific, and suggest that LoC can help explain the mixed evidence documented in the existing literature.