Risk aversion and wealth: evidence from person-to-person lending portfolios

Paravisini, Daniel, Rappoport, Veronica and Ravina, Enrichetta (2016) Risk aversion and wealth: evidence from person-to-person lending portfolios. Management Science . ISSN 0025-1909

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Abstract

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.

Item Type:	Article
Official URL:	http://pubsonline.informs.org/journal/mnsc
Additional Information:	© 2015 INFORMS
Library of Congress subject classification:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Journal of Economic Literature Classification System:	D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Sets:	Departments > Finance Collections > Economists Online Research centres and groups > Centre for Economic Performance (CEP) Research centres and groups > Managerial Economics and Strategy Group
Funders:	Program for Financial Studies
Date Deposited:	29 May 2015 10:50
URL:	http://eprints.lse.ac.uk/62137/

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