Working Paper: NBER ID: w16063
Authors: Daniel Paravisini; Veronica Rappoport; Enrichetta Ravina
Abstract: We estimate risk aversion from the actual financial decisions of 2,168 investors in Lending Club (LC), a person-to-person lending platform. We develop a methodology that allows us to estimate risk aversion parameters from each portfolio choice. Since the same individual makes repeated investments, we are able to construct a panel of risk aversion parameters that we use to disentangle heterogeneity in attitudes towards risk from the elasticity of investor-specific risk aversion to changes in wealth. In the cross section, we find that wealthier investors are more risk averse. Using changes in house prices as a source of variation, we find that investors become more risk averse after a negative wealth shock. These preferences consistently extrapolate to other investor decisions within LC.
Keywords: risk aversion; wealth; lending club; peer-to-peer lending; portfolio choice
JEL Codes: D12; D14; E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wealth (D31) | Risk Aversion (D81) |
| Negative Wealth Shock (G51) | Risk Aversion (D81) |
| Wealth (D31) | Absolute Risk Aversion (ARA) (D81) |
| Wealth (D31) | Relative Risk Aversion (RRA) (D81) |
| Negative Wealth Shock (G51) | Curvature of Utility Function (D11) |