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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

Wolfgang Breuer

RWTH Aachen University

Michael Riesener

RWTH Aachen University - Chair for Business Administration, particularly Business Finance

Astrid Juliane Salzmann

RWTH Aachen University - Department of Finance

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

Breuer, Wolfgang and Riesener, Michael and Salzmann, Astrid Juliane, Risk Aversion vs. Individualism: What Drives Risk Taking in Household Finance? (November 8, 2011). European Journal of Finance 20, 446-462, 2014. Available at SSRN: https://ssrn.com/abstract=1956777 or http://dx.doi.org/10.2139/ssrn.1956777

Wolfgang Breuer

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Michael Riesener

RWTH Aachen University - Chair for Business Administration, particularly Business Finance ( email )

Templergraben 64
Aachen, 52056
Germany

Astrid Salzmann (Contact Author)

RWTH Aachen University - Department of Finance ( email )

Templergraben 64
Aachen, 52056
Germany

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