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

L. E. CALVET, P. Sodini

The Journal of Finance

April 2014, vol. 69, n°2, pp.867-906

Departments: Finance

Keywords: Portfolio management (Investments), Research, Risk aversion, Utility theory, Human capital, Microeconomics, Psychological aspects, Twins

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