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Twin Picks: Disentangling the Determinants of Risk‐Taking in Household Portfolios
Author(s) -
CALVET LAURENT E.,
SODINI PAOLO
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12125
Subject(s) - portfolio , habit , economics , risk aversion (psychology) , capital (architecture) , systematic risk , function (biology) , panel data , panel study of income dynamics , monetary economics , demographic economics , econometrics , financial economics , expected utility hypothesis , psychology , archaeology , evolutionary biology , biology , psychotherapist , history
This paper investigates risk‐taking in the liquid portfolios held by a large panel of Swedish twins. We document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth, leading to different risk sensitivities across investors. Human capital, which we estimate directly from individual labor income, also affects risk‐taking positively, while internal habit and expenditure commitments tend to reduce it. Our microfindings lend strong support to decreasing relative risk aversion and habit formation preferences. Furthermore, heterogeneous risk sensitivities across investors help reconcile individual preferences with representative‐agent models.