Once Bitten, Twice Shy: The Role of Inertia and Personal Experiences in Risk Taking

54 Pages Posted: 8 Oct 2014 Last revised: 1 Aug 2016

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Tobin Hanspal

Goethe University Frankfurt, House of Finance - Research Center SAFE

Kasper Meisner Nielsen

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 26, 2016

Abstract

We study how inertia and personal experiences affect individual risk taking. Our research design relies on active portfolio decisions relating to inheritances to separate the effect of personal experiences from inertia, which otherwise would be observationally equivalent. Experience derives from investments in banks that defaulted following the financial crisis. We classify experiences into first-hand experiences, resulting from personal losses; second-hand experiences, from the losses of close family members; and third-hand experiences, from living in municipalities where banks defaulted. Our results demonstrate that experiences gained personally, aside from inertia or common shocks, explain substantial heterogeneity in individuals’ risk taking.

Keywords: Experiences, Inertia, Risk taking, Financial crisis, Household finance

JEL Classification: D03, D14, G11

Suggested Citation

Andersen, Steffen and Hanspal, Tobin and Nielsen, Kasper Meisner, Once Bitten, Twice Shy: The Role of Inertia and Personal Experiences in Risk Taking (July 26, 2016). Available at SSRN: https://ssrn.com/abstract=2506627 or http://dx.doi.org/10.2139/ssrn.2506627

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Tobin Hanspal (Contact Author)

Goethe University Frankfurt, House of Finance - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Kasper Meisner Nielsen

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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