Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions

99 Pages Posted: 14 Jul 2016 Last revised: 25 Apr 2018

Chen Lian

Massachusetts Institute of Technology (MIT)

Yueran Ma

University of Chicago - Booth School of Business

Carmen Wang

Harvard University - Department of Economics; HBS Negotiations, Organizations and Markets Unit

Date Written: April 16, 2018

Abstract

How do low interest rates affect investor behavior? We demonstrate that individuals “reach for yield,” that is, have a greater appetite for risk taking when interest rates are low. Using randomized investment experiments holding fixed risk premia and risks, we show low interest rates lead to significantly higher allocations to risky assets, among MTurk subjects and HBS MBAs. The behavior is not easily explained by conventional portfolio choice theory or institutional frictions. We then propose and provide evidence for mechanisms related to investor psychology, including reference dependence and salience. We also present results using observational data on household investment decisions.

Keywords: Low interest rates, risk taking, investment experiment, reference dependence, salience

JEL Classification: D14, E44, E52, G11, G40

Suggested Citation

Lian, Chen and Ma, Yueran and Wang, Carmen, Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions (April 16, 2018). Available at SSRN: https://ssrn.com/abstract=2809191 or http://dx.doi.org/10.2139/ssrn.2809191

Chen Lian

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Yueran Ma (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Carmen Wang

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

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