DO PSYCHOLOGICAL SHOCKS AFFECT FINANCIAL RISK TAKING BEHAVIOR? A STUDY OF U.S. VETERANS

Abstract

Traditional economic theories assume that individuals are endowed with certain risk preferences that are unaltered by experiences. However, recent evidence indicates that macroeconomic shocks do have an effect on an individual's willingness to take financial risks. In the context of investment decisions, we examine empirically whether an individual's risk preferences are affected by other types of traumatic life experiences. Using a unique proprietary data set, we investigate whether personal traumatic experiences—such as the combat experiences of veterans—have long‐term effects on financial risk‐taking behavior. We find that having experienced combat decreases the probability of investing in risky assets. Key policy implications are noted. (JEL G11, D14)

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