Natural-Disaster Experience and Risk-taking Behaviors: Evidence from Individual Investor Trading

Abstract

This research analyzes how experiencing a natural disaster influences individual investor trading in the stock market. Exploiting a unique stock trading dataset of retail investors in Taiwan, we determine that individual investors who experienced major natural disasters trade more aggressively and earn abnormal returns than do those who lack such experience. Difference-in-Difference analysis confirms our finding. Furthermore, this effect is considerably stronger for stocks preferred by individual investors. Our results imply that individual investors who experience major natural disasters become more risk-tolerant. Our finding is further corroborated by tests based on disease and fire experiences.

Keywords: Natural disaster experience, individual investors, trading behavior, gambling stocks, abnormal returns.

JEL Classification: G11, G12, G40