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Risk-Taking Adaptation to Macroeconomic Experiences

Remy Levin and Daniela Vidart
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Remy Levin: University of Connecticut

No 2021-09, Working papers from University of Connecticut, Department of Economics

Abstract: We study how lifetime experiences of macroeconomic volatility shape individual attitudes towards risk. We build a Bayesian model of choice in which an agent’s risk aversion endogenously adapts to their evolving beliefs about the mean and variance of an exogenous income process. We then link large-scale panel surveys from Indonesia and Mexico containing repeat elicited measures of risk aversion for the same subjects years apart with state-level real GDP growth time series capturing their lifetime macroeconomic experiences. In line with the model’s predictions, we find that in both countries measured risk aversion decreases with experienced mean growth and increases with experienced growth volatility. The effects of volatility are 0.5–1.9 times the effect of the mean, indicating that experiences of macroeconomic volatility are first-order drivers of individual risk attitudes. These results are robust to a variety of alternate specifications and controls and extend to changes in risk-taking behavior in other domains.

Keywords: Risk attitudes; experience effects; macroeconomic volatility; growth (search for similar items in EconPapers)
JEL-codes: D81 D83 E32 G11 O11 (search for similar items in EconPapers)
Pages: 96 pages
Date: 2021-05, Revised 2022-08
New Economics Papers: this item is included in nep-agr, nep-cwa, nep-dev, nep-mac and nep-sea
Note: Remy Levin is the corresponding author
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