Can Risk‐Averse Households Make Risky Investments? The Role of Trust in Others

AuthorBarbara Cavasso,Alessandro Bucciol,Luca Zarri
Published date01 January 2019
Date01 January 2019
DOIhttp://doi.org/10.1111/sjoe.12278
Scand. J. of Economics 121(1), 326–352, 2019
DOI: 10.1111/sjoe.12278
Can Risk-Averse Households Make Risky
Investments? The Role of Trust in Others*
Alessandro Bucciol
University of Verona, 37129 Verona, Italy
alessandro.bucciol@univr.it
Barbara Cavasso
University of Padua, 35123 Padua, Italy
barbaracavasso@gmail.com
Luca Zarri
University of Verona, 37129 Verona, Italy
luca.zarri@univr.it
Abstract
In this paper, using data from the Survey on Health,Ageing and Retirement in Europe (SHARE,
2006 and 2013 waves), we illustrate the link between individuals’ attitudes to financial risk
combined with their willingness to trust others, and their investments in risky assets. Individuals
who display either risk tolerance alone or – to a lesser extent – risk aversion and trust more
frequently decide to buy risky assets.The comparison between Scandinavian and Mediterranean
countries indicates that trust plays qualitatively different roles depending on the prevailing
combination of risk attitude and trust in the area being studied.
Keywords: Generalizedtrust; por tfolio choice; risk attitude
JEL classification:D03; D14; D81; G11
I. Introduction
Over the last few years, a growing number of studies have sought to
identify the major determinants of financial risk-taking, with special regard
to households’ decisions to invest in risky assets, such as stocks. The
existing body of literature has established that financial risk-taking is
widely heterogeneous in the population, and that it is highly correlated
with individual-level variables, such as gender, education, and race
(Kimball et al., 2008), age (Jianakoplos and Bernasek, 2006), and personal
*Wethank Flavia Coda Moscarola and the seminar participants at the University of Copenhagen,
the 2015 IAREP–SABE Conference in Sibiu, and the 2016 MoPActWorkshop in Turin.We use
data from SHARE wave 2 release 2.6.0 (doi: 10.6103/SHARE.w2.260) and wave5 release 1.0.0
(doi: 10.6103/SHARE.w5.100); see www.share-project.org.The usual disclaimers apply.
C
The editors of The Scandinavian Journal of Economics 2017.
A. Bucciol, B. Cavasso, and L. Zarri 327
background (Dohmen et al., 2011), as well as wealth (Bucciol and Miniaci,
2011), health (Rosen and Wu, 2004), and cognitive ability (Christelis et al.,
2010). Even though financial risk-taking seems to be transmitted, to some
extent, genetically (Cesarini et al., 2010) and intergenerationally (Dohmen
et al., 2012), individuals’ prior life experiences (e.g., passing through a
large macroeconomic shock or a major traumatic event, such as the death
of a child) have been shown to play an important role (Malmendier and
Nagel, 2011; Bucciol and Zarri, 2015). These results support the idea
that financial risk-taking, far from being rigid (as traditionally believed),
is instead malleable and can be shaped by several life events, including
social interactions (Hong et al., 2004; Ahern et al., 2014).
Some recent studies have investigated the link between portfolio
choices and a variable aimed at capturing an inherently “social” individual
attitude, such as an individual’s “willingness to trust others” (or their
degree of “generalized trust”; see, in particular, Guiso et al., 2008).
In this paper, we examine the relationship between individual investors’
financial risk attitudes and their trust in others, and we illustrate
the link between these attitudes and portfolio decisions. The reason
why we have addressed this research question is twofold. First, even
though risk attitude and trust are arguably correlated in many domains
(including the financial domain) and trust is sometimes considered to
be just one type of risk-taking,1recent work convincingly documents
that these two attitudes involve distinct neural and cognitive mechanisms
(Fehr, 2009; Ahern et al., 2014) as well as different intergenerational
transmission channels (Dohmen et al., 2012).2Secondly, even though
we know from previous studies that both financial risk attitude and
willingness to trust others are independently relevant to our understanding
of investors’ portfolio choices, so far the specific mechanisms underlying
their influence on decisions to invest in risky assets (Houser et al.,
2010), as well as their connections to these decisions, have not been
rigorously identified.
In principle, it could be the case that, at the micro level, we need both
risk tolerance and a high level of trust to detect a significant correlation
with risky financial behavior.3In contrast, it could be the case that a high
1By definition trust involves an element of risk: ifA tr usts B,then A runs the risk that B betrays
A (i.e., acts in a non-trustworthy manner).
2Fehr (2009) reviewsstrong neurobiological, genetic, and behavioral evidence showing that trust
taking differs significantly from behavior towards non-socially constituted risks, so that trust
cannot be viewed just as a special case of risk-taking. On this distinction, see also Guiso et al.
(2008), Houser et al. (2010), and Butler et al. (2016).
3As we make clear in Section III, in our empirical analysis we assess financial risk-taking by
means of a binary variable through which we classify individuals as risk-averse if they are “not
willing to take any financial risks”, and as risk-tolerant otherwise.
C
The editors of The Scandinavian Journal of Economics 2017.

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