Scandinavian Working Papers in Economics

Knut Wicksell Working Paper Series,
Lund University, Knut Wicksell Centre for Financial Studies

No 2015/7: On The Origins of Risk-Taking in Financial Markets

Sandra E. Black , Paul Devereux , Petter Lundborg and Kaveh Majlesi
Additional contact information
Sandra E. Black: Knut Wicksell Centre for Financial Studies, Lund University
Paul Devereux: Knut Wicksell Centre for Financial Studies, Lund University
Petter Lundborg: Knut Wicksell Centre for Financial Studies, Lund University
Kaveh Majlesi: Knut Wicksell Centre for Financial Studies, Lund University

Abstract: Risk-taking in financial markets is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use data on stock market participation of Swedish adoptees and relate this to the investment behavior of both their biological and adoptive parents. We find that stock market participation of parents increases that of children by about 34% and that both pre-birth and post-birth factors are important. However, once we condition on having positive financial wealth, we find that nurture has a much stronger influence on risk-taking by children, and the evidence of a relationship between stock-holding of biological parents and their adoptive children becomes weaker. We find similar results when we study the share of financial wealth that is invested in stocks. This suggests that a substantial proportion of the transmission of risk behavior from parents to children is environmentally determined.

Keywords: Intergenerational mobility; nature versus nurture; portfolio allocation

JEL-codes: G11; J13; J62

48 pages, August 1, 2015

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