The shadow of the past: Financial risk taking and negative life events

Based on data from the four 2004–2010 waves of the US Health and Retirement Study (HRS), we show that financial risk taking is significantly related to life-history negative events out of an individual’s control. Using observed portfolio decisions to proxy for risk taking, we find correlation with two of such individual-specific events: having been victim of a physical attack and (especially) the loss of a child are associated with lower and less frequent investments in risky assets, with an intensity similar to that of the beginning, in 2008, of a collectively experienced event such as the recent financial crisis. We also find evidence that the correlation of risk taking with a child loss is long-lasting, as opposed to the correlation with a physical attack that disappears after few years. Our analysis is more in favor of a preference-based – rather than a belief-based – explanation of the observed change in risk taking. Overall our findings indicate that the past, especially through the loss of a child, casts a long shadow that extends over individuals’ current decisions also within unrelated domains.