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

48 Pages Posted: 14 Jul 2016 Last revised: 19 Jul 2017

Chen Lian

Massachusetts Institute of Technology (MIT)

Yueran Ma

Harvard University

Carmen Wang

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

Date Written: July 18, 2017

Abstract

In recent years, interest rates reached historic lows in many countries. We document that individual investors "reach for yield," that is, have a greater appetite for risk taking when interest rates are low. Using an investment experiment holding fixed risk premia and risks, we show that low interest rates lead to significantly higher allocations to risky assets, among MTurk subjects and HBS MBAs. This behavior cannot be easily explained by conventional portfolio choice theory or by institutional frictions. We then propose and test explanations related to investor psychology. We also present complementary evidence using historical 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 (July 18, 2017). 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)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
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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