Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios
We estimate risk aversion from the actual financial decisions of 2,168 investors in Lending Club (LC), a person-to-person lending platform. We develop a methodology that allows us to estimate risk aversion parameters from each portfolio choice. Since the same individual makes repeated investments, we are able to construct a panel of risk aversion parameters that we use to disentangle heterogeneity in attitudes towards risk from the elasticity of investor-specific risk aversion to changes in wealth. In the cross section, we find that wealthier investors are more risk averse. Using changes in house prices as a source of variation, we find that investors become more risk averse after a negative wealth shock. These preferences consistently extrapolate to other investor decisions within LC.
We are grateful to Lending Club for providing the data and for helpful discussions on this project. We thank Michael Adler, Manuel Arellano, Nick Barberis, Geert Bekaert, Patrick Bolton, John Campbell, Larry Glosten, Nagpurnanand Prabhala, Bernard Salanie, and seminar participants at CEMFI, Columbia University GSB, Duke Fuqua School of Business, Hebrew University, Harvard Business School, Kellogg School of Management, Kellstadt Graduate School of Business-DePaul, London Business School, Maryland Smith School of Business, M.I.T. Sloan, Universidad Nova de Lisboa, the Yale 2010 Behavioral Science Conference, and the SED 2010 meeting for helpful comments. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Daniel Paravisini & Veronica Rappoport & Enrichetta Ravina, 2017. "Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios," Management Science, vol 63(2), pages 279-297.