Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios

Cahier de recherche du Groupe HEC Paris, n° 948/2011; This paper investigates the determinants of financial risk-taking and documents new facts on the financial wealth elasticity of the risky share in a panel of Swedish twins. We consider a uniquely comprehensive set of demographic and financial characteristics, and use yearly twin pair fixed effects to control for genes and shared background. Consistent with cross-sectional evidence (e.g. Carroll 2002) but in contrast to recent panel studies, we document that financial wealth is the dominant characteristic driving the asset allocation of individual investors. The average financial wealth elasticity of the risky share is positive and strongly significant among participants, which suggests that individual investors have decreasing relative risk aversion. Furthermore, the financial wealth elasticity of the risky share itself is heterogeneous across investors and varies strongly with characteristics; the elasticity decreases with financial wealth and human capital, and increases with habit, residential real estate, and household size. As a consequence, the elasticity of the aggregate demand for risky assets to exogenous wealth shocks is close to, but does not coincide with, the elasticity of a representative investor with constant relative risk aversion. We confirm the robustness of our results by running time-differenced instrumental variable regressions, and by controlling for zygosity, lifestyle, mental and physical health, the intensity of communication between twins, and measures of social interactions.