Risk Aversion vs. Individualism: What Drives Risk Taking in Household Finance?
European Journal of Finance 20, 446-462, 2014
29 Pages Posted: 10 Nov 2011 Last revised: 31 Jul 2014
Date Written: November 8, 2011
Abstract
Despite a considerable premium on equity with respect to risk free assets, many households do not own stocks. We ask why the prevalence of stockholding is so limited. We focus on individuals’ attitudes towards risk and identify relevant factors that affect the willingness to take financial risks. Our empirical evidence contradicts standard portfolio theory, as it does not indicate a significant relationship between risk aversion and financial risk taking. However, our analysis supports the behavioral view that psychological factors rooted in national culture affect portfolio choice. Individualism, which is linked to overconfidence and overoptimism, has a significantly positive effect on financial risk taking. In micro data from Germany and Singapore, as well as in cross-country data, we find evidence consistent with low levels of individualism being an important factor in explaining the limited participation puzzle.
Keywords: Household Finance, Individualism, Risk Aversion, Risk Taking
JEL Classification: A13, D14, G11, Z13
Suggested Citation: Suggested Citation
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