Once Bitten, Twice Shy: The Power of Personal Experiences in Risk Taking
56 Pages Posted: 8 Oct 2014 Last revised: 12 Jan 2018
Date Written: November 2017
We study how personal experiences affect individual risk taking. To separate the intertwining effects of personal experiences and wealth changes, our identification strategy relies on the decision to keep or rebalance unexpected inheritances of risky assets. Experience derives from investments in banks that defaulted in the aftermath of the financial crisis. To differentiate the effect of personal experiences, we classify the degrees of experiences into first-hand experiences from personal losses, second-hand experiences from the losses of close family members, and third-hand experiences from living in municipalities where banks defaulted. We find that third-hand experiences result in marginally lower risk taking. Second-hand experiences have a relatively stronger negative effect, whereas the effect of first-hand experiences on risk taking is strongly negative. Overall, our results demonstrate that personal experiences aside from changes in wealth explain substantial heterogeneity in individuals’ risk taking.
Keywords: Experiences, Risk taking, Financial crisis, Household finance
JEL Classification: D03, D14, G11
Suggested Citation: Suggested Citation