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

57 Pages Posted: 20 Sep 2016

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Tobin Hanspal

WU Vienna University of Economics and Business

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

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Date Written: September 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, financial crisis, household finance, Inertia, Risk Taking

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 (September 2016). CEPR Discussion Paper No. DP11504, Available at SSRN: https://ssrn.com/abstract=2840701

Steffen Andersen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Tobin Hanspal

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

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