Working Paper: CEPR ID: DP8904
Authors: Kees Koedijk; Rachel A.J. Pownall; Meir Statman
Abstract: Financial well-being is distinct from income. Some people with high incomes suffer low financial well-being, as their incomes fall short of their aspirations. Such people feel propelled to reach their aspirations by taking risk and willing to bear losses. Conversely, some people with low incomes enjoy high financial well-being, as their incomes exceed their aspirations. We find that people whose aspirations exceed their income are less risk-averse and less loss-averse than people whose incomes exceed their aspirations. We also find that competitive and status-seeking people are less risk-averse than people who are less competitive and status-seeking, and that status-seeking people are less loss-averse than people who are not as status-seeking.
Keywords: behavioral portfolio theory; loss aversion; prospect theory; risk taking; subjective wellbeing
JEL Codes: D81; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Individuals with low financial wellbeing (G51) | Individuals with low risk aversion (D11) |
| Individuals with low financial wellbeing (G51) | Individuals with low loss aversion (G40) |
| Competitive and status-seeking individuals (D16) | Individuals with low risk aversion (D11) |
| Competitive and status-seeking individuals (D16) | Individuals with low loss aversion (G40) |
| Individuals whose aspirations exceed their income (D31) | Individuals with low risk aversion (D11) |
| Individuals whose incomes exceed their aspirations (D31) | Individuals with high risk aversion (D81) |