Risk-Taking Adaptation to Macroeconomic Experiences: Theory and Evidence from Developing Countries

80 Pages Posted: 1 Feb 2021

See all articles by Remy Levin

Remy Levin

University of Connecticut

Daniela Vidart

University of California, San Diego (UCSD)

Date Written: October 14, 2020

Abstract

How do lifetime experiences of macroeconomic risk shape attitudes towards risk? We study this question theoretically and empirically for individuals in developing countries. We build a Bayesian model of choice in which agents' risk attitude adapts to their evolving beliefs about background risk. Our model predicts that risk aversion will increase monotonically in the variance of the background risk, and will decrease convexly in the mean. We test the model by linking longitudinal surveys from Indonesia and Mexico, containing elicited measures of risk aversion for the same subjects years apart, with state-level real GDP growth time series capturing their lifetime macroeconomic experiences. In both countries measured risk aversion significantly increases in experienced growth volatility and significantly decreases in experienced mean growth. The effect of volatility is 0.9-4.3 times the effect of the mean, indicating that experiences of volatility are first-order drivers of risk attitudes.

Keywords: Risk attitudes, experience effects, macroeconomic volatility, development

JEL Classification: D14, D81, D83, E32, G11, O11, O12

Suggested Citation

Levin, Remy and Vidart, Daniela, Risk-Taking Adaptation to Macroeconomic Experiences: Theory and Evidence from Developing Countries (October 14, 2020). Available at SSRN: https://ssrn.com/abstract=3748186 or http://dx.doi.org/10.2139/ssrn.3748186

Remy Levin (Contact Author)

University of Connecticut ( email )

Storrs, CT 06269-1063
United States

Daniela Vidart

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

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