Once Bitten, Twice Shy: The Power of Personal Experiences in Risk Taking

56 Pages Posted: 8 Oct 2014 Last revised: 12 Jan 2018

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Tobin Hanspal

Research Center SAFE, Goethe University Frankfurt

Kasper Meisner Nielsen

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

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

Andersen, Steffen and Hanspal, Tobin and Nielsen, Kasper Meisner, Once Bitten, Twice Shy: The Power of Personal Experiences in Risk Taking (November 2017). Journal of Financial Economics (JFE), Forthcoming. 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)

Research Center SAFE, Goethe University Frankfurt ( 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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