Selected Journal Publications


Once Bitten Twice Shy: The Power of Personal Experience in Risk Taking

Once Bitten, Twice Shy: How Inertia and Personal Experiences Affect Risk Taking
ANDERSEN, Steffen | HANSPAL, Tobin | NIELSEN, Kasper Meisner
Journal of Financial Economics 132 (3), 97-117, June 2019

In the aftermath of financial crises, one might assume individuals become wary of risk. But is that because of what they have seen in the news, or do they need personal experience to act? A new study on the 2007-2009 global financial crisis shows that personal experience is indeed a driving factor and it can motivate people to not only be wary, but to actively move out of risky assets.

The study, by Steffen Andersen, Tobin Hanspal and Kasper Meisner Nielsen, looked at a rich set of data from Denmark that allowed them to identify people who inherited assets from 2006-2012 and to track what they did with their windfall. Furthermore, they were able to see if these individuals had experienced asset loss prior to their inheritance, whether they had close relatives who experienced such loss and whether they lived in a community where a bank had defaulted.

“We wanted to know if individuals have to feel the pain themselves or if common shocks were enough to make them actively reduce their exposure to risky assets,” the authors said.

Danish stockholders as a whole held a portfolio with strong exposure to bank stocks prior to the financial crisis. About 1.2 million individuals held stocks, which amounted to 30 per cent of their liquid wealth. Some 67.7 per cent of them bank stocks and 40.1 per cent held only bank stocks. But banks were hit hard by the crisis and between 2008 and 2012, eight publicly traded banks defaulted, resulting in significant losses for more than 108,000 shareholders who lost on average 17.9 per cent of their portfolio.

The study results showed that first-hand experiences of such losses had a significant effect on beneficiaries, who reduced their fraction of liquid wealth held in stocks by 9.2 percentage points (relative to the 30 per cent of wealth in stocks). Those with a second-hand experience (close relatives experiencing a loss) reduced the fraction by one percentage point. But those living near a defaulted bank showed little difference in their risk allocation compared to beneficiaries with common experiences outside these three categories.

The implication is that the close experience with loss drove people away from risky assets but the authors also considered whether the results could be explained simply by different investment styles among people who inherit. They were able to rule this out conclusively.

“We found individuals who inherited before they experienced a default actively increased their risk taking on average by 3.1 percentage points, but those who inherited after they experienced a default reduced the fraction by 9.2 percentage points – making a total difference of 12.3 percentage points,” they said. “The latter group of investors were less willing to hold risky assets even when they received a significantly positive windfall that more than offset their losses.”

Lack of trust in banks seems to be a key factor behind their caution. These individuals were not only more likely to sell bank stocks than non-bank stocks, but also bank-managed mutual funds than non-bank-managed funds. This is despite the fact that moving away from risky assets may not be in their own best interests.

“The welfare costs of the lower levels of risk-taking are likely to be substantial and will lead to significantly lower lifetime consumption,” the authors said.

“Our research raises a question of what and how individuals learn from their past investment experiences. An appropriate response to the personal experiences we documented would be to diversify the portfolio. Rather, individuals seem to shy away from risk by selling the risky asset they inherit and holding cash. In short, they react according to the maxim, once bitten, twice shy.”


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