Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios

We estimate risk aversion from the actual financial decisions of 2,168 investors in a person-toperson lending platform. We develop a method to estimate a risk aversion parameter from each portfolio choice. Since the same individuals invest repeatedly, we construct a panel dataset that we use to disentangle heterogeneity in attitudes towards risk across investors, from the elasticity of risk aversion to changes in wealth for a given investor. We find that wealthier investors are more risk averse in the cross section, and that investors become more risk averse after a negative housing wealth shock. Thus, investors exhibit preferences consistent with decreasing relative risk aversion and habit formation. JEL codes: E21, G11, D12, D14. ∗We are grateful to Lending Club for providing the data and for helpful discussions on this project. We thank Michael Adler, Manuel Arellano, Nick Barberis, Geert Bekaert, Patrick Bolton, John Campbell, Larry Glosten, Nagpurnanand Prabhala, Bernard Salanie, and seminar participants at CEMFI, Columbia University GSB, Duke Fuqua School of Business, Hebrew University, Harvard Business School, Kellogg School of Management, Kellstadt Graduate School of Business-DePaul, London Business School, Maryland Smith School of Business, M.I.T. Sloan, Universidad Nova de Lisboa, the Yale 2010 Behavioral Science Conference, and the SED 2010 meeting for helpful comments. We thank the Program for Financial Studies for financial support. All remaining errors are our own. Please send correspondence to Daniel Paravisini ([email protected]), Veronica Rappoport ([email protected]), and Enrichetta Ravina ([email protected]).