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Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios

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  • Daniel Paravisini

    (London School of Economics, London, WC2A 2AE, United Kingdom; Centre for Economic Policy Research, London EC1V 3PZ, United Kingdom)

  • Veronica Rappoport

    (London School of Economics, London, WC2A 2AE, United Kingdom; Centre for Economic Policy Research, London EC1V 3PZ, United Kingdom)

  • Enrichetta Ravina

    (Columbia Business School, Columbia University, New York, New York 10027)

Abstract

We estimate risk aversion from investors’ financial decisions in a person-to-person lending platform. We develop a method that obtains a risk-aversion parameter from each portfolio choice. Since the same individuals invest repeatedly, we construct a panel data set that we use to disentangle heterogeneity in attitudes toward risk across investors, from the elasticity of risk aversion to changes in wealth. We find that wealthier investors are more risk averse in the cross section and that investors become more risk averse after a negative housing wealth shock. Thus, investors exhibit preferences consistent with decreasing relative risk aversion and habit formation. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2317 .

Suggested Citation

  • Daniel Paravisini & Veronica Rappoport & Enrichetta Ravina, 2017. "Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios," Management Science, INFORMS, vol. 63(2), pages 279-297, February.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:2:p:279-297
    DOI: 10.1287/mnsc.2015.2317
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