Risk-Taking Adaptation to Macroeconomic Experiences

We study how lifetime experiences of macroeconomic volatility shape individual risk attitudes. We build a Bayesian model where risk aversion endogenously adapts to agents’ beliefs about an exogenous income process. We combine panel data from Indonesia and Mexico containing elicited measures of risk aversion with state-level real GDP growth time series capturing individuals’ lifetime macroeconomic experiences. In line with the model’s predictions, we find that measured risk aversion increases with macroeconomic volatility, and that this is a first-order driver of risk attitudes. These results are robust to many alternate specifications and controls and extend to risk-taking behavior in other domains.