Scandinavian Working Papers in Economics

Working Paper Series,
Stockholm University, Swedish Institute for Social Research

No 15/2023: Financial Windfalls, Portfolio Allocations, and Risk Preferences

Joseph Briggs (), David Cesarini (), Sean Chanwook Lee (), Erik Lindqvist () and Robert Östling ()
Additional contact information
Joseph Briggs: Goldman Sachs
David Cesarini: New York University
Sean Chanwook Lee: Harvard University
Erik Lindqvist: Swedish Institute for Social Research, Stockholm University, Postal: SOFI, Stockholm University, SE-106 91 Stockholm, Sweden
Robert Östling: Stockholm School of Economics

Abstract: We investigate the impact of financial windfalls on household portfolio choices and risk exposure. Exploiting the randomized assignment of lottery prizes in three Swedish lotteries, we find a windfall gain of $100K leads to a 5-percentage-point de- crease in the risky share of household portfolios. We show theoretically that negative wealth effects are consistent with both constant and decreasing relative risk aversion and analyze how our empirical estimates help distinguish between competing models of portfolio choice. We further show our results are quantitatively aligned with the predictions of a calibrated dynamic portfolio choice model with nontradable human capital and consumption habits.

Keywords: risk preferences; portfolio choice

JEL-codes: G11; G50

Language: English

71 pages, November 21, 2023

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