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Financial Windfalls, Portfolio Allocations, and Risk Preferences

Author

Listed:
  • Briggs, Joseph

    (Goldman Sachs)

  • Cesarini, David

    (New York University)

  • Chanwook Lee, Sean

    (Harvard University)

  • Lindqvist, Erik

    (Swedish Institute for Social Research, Stockholm University)

  • Östling, Robert

    (Stockholm School of Economics)

Abstract

We investigate the impact of financial windfalls on household portfolio choices and risk exposure. Exploiting the randomized assignment of lottery prizes in three Swedish lotteries, we find a windfall gain of $100K leads to a 5-percentage-point de- crease in the risky share of household portfolios. We show theoretically that negative wealth effects are consistent with both constant and decreasing relative risk aversion and analyze how our empirical estimates help distinguish between competing models of portfolio choice. We further show our results are quantitatively aligned with the predictions of a calibrated dynamic portfolio choice model with nontradable human capital and consumption habits.

Suggested Citation

  • Briggs, Joseph & Cesarini, David & Chanwook Lee, Sean & Lindqvist, Erik & Östling, Robert, 2023. "Financial Windfalls, Portfolio Allocations, and Risk Preferences," Working Paper Series 15/2023, Stockholm University, Swedish Institute for Social Research.
    • Handle: RePEc:hhs:sofiwp:2023_015
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    References listed on IDEAS

    as
    1. Laun, Tobias & Wallenius, Johanna, 2015. "A life cycle model of health and retirement: The case of Swedish pension reform," Journal of Public Economics, Elsevier, vol. 127(C), pages 127-136.
    2. James J. Choi & David Laibson & Brigitte C. Madrian, 2009. "Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect," American Economic Review, American Economic Association, vol. 99(5), pages 2085-2095, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    risk preferences; portfolio choice;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G50 - Financial Economics - - Household Finance - - - General

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