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Once Bitten, Twice Shy: The Role of Inertia and Personal Experiences in Risk Taking

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  • Andersen, Steffen
  • Hanspal, Tobin
  • Nielsen, Kasper Meisner

Abstract

We study how inertia and personal experiences affect individual risk taking. Our research design relies on active portfolio decisions relating to inheritances to separate the effect of personal experiences from inertia, which otherwise would be observationally equivalent. Experience derives from investments in banks that defaulted following the financial crisis. We classify experiences into first-hand experiences, resulting from personal losses; second-hand experiences, from the losses of close family members; and third-hand experiences, from living in municipalities where banks defaulted. Our results demonstrate that experiences gained personally, aside from inertia or common shocks, explain substantial heterogeneity in individuals’ risk taking.

Suggested Citation

  • Andersen, Steffen & Hanspal, Tobin & Nielsen, Kasper Meisner, 2016. "Once Bitten, Twice Shy: The Role of Inertia and Personal Experiences in Risk Taking," CEPR Discussion Papers 11504, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11504
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    Cited by:

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    2. Gregor Dorfleitner & Lars Hornuf & Martina Weber, 2018. "Paralyzed by Shock: The Portfolio Formation Behavior of Peer-to-Business Lending Investors," CESifo Working Paper Series 7092, CESifo.
    3. Liu, Xiaoge & Miao, Miao & Liu, Ruiming, 2020. "Litigation and corporate risk taking: Evidence from Chinese listed firms," International Review of Law and Economics, Elsevier, vol. 61(C).
    4. Steffen Meyer & Michaela Pagel, 2019. "Fully Closed: Individual Responses to Realized Gains and Losses," NBER Working Papers 25542, National Bureau of Economic Research, Inc.
    5. Hanspal, Tobin, 2016. "The effect of personal financing disruptions on entrepreneurship," SAFE Working Paper Series 161, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    Experiences; Inertia; Risk taking; Financial crisis; Household finance;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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