Are the Risk Attitudes of Professional Investors Affected by Personal Catastrophic Experiences?
51 Pages Posted: 24 Aug 2017 Last revised: 7 Feb 2018
Date Written: January 23, 2018
We adopt a novel empirical approach to show that the risk attitudes of professional investors are affected by their catastrophic experiences – even for catastrophes with no economic impact on these investors or their portfolio firms. We study the portfolio risk of U.S.-based mutual funds that invest outside the U.S. before and after fund managers personally experience severe natural disasters. Using differences-in-differences, we compare managers in disaster versus non-disaster counties matched on prior disaster probability and fund characteristics. We find that monthly fund return volatility decreases by roughly 60 bps in year 1 and the effect disappears by year 3. Systematic risk drives the results. Additional analyses rule out wealth effects (using disasters with no damages) and managerial agency, skill, and catering explanations.
Keywords: Mutual funds, Risk taking, Catastrophes, Natural disasters, Psychology, Behavioral
JEL Classification: D01, D81, G02, G11, G23
Suggested Citation: Suggested Citation