Working Paper: NBER ID: w31864
Authors: Joseph S. Briggs; David Cesarini; Sean Chanwook Lee; Erik Lindqvist; Robert Ståhl
Abstract: We investigate the impact of financial windfalls on household portfolio choices and risk exposure. Exploiting the randomized assignment of lottery prizes in three Swedish lotteries, we find a windfall gain of $100K leads to a 5-percentage-point decrease in the risky share of household portfolios. We show theoretically that negative wealth effects are consistent with both constant and decreasing relative risk aversion and analyze how our empirical estimates help distinguish between competing models of portfolio choice. We further show our results are quantitatively aligned with the predictions of a calibrated dynamic portfolio choice model with nontradable human capital and consumption habits.
Keywords: financial windfalls; portfolio allocations; risk preferences
JEL Codes: G11; G5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial windfall of 100k (G59) | Decrease in the risky share of household portfolios (G59) |
| Financial windfall of 100k (G59) | Changes in portfolio choices (G11) |
| Decrease in the risky share of household portfolios (G59) | Long-term impact on portfolio allocation (G11) |
| Financial windfall of 100k (G59) | Increase in relative risk aversion (D11) |