The Impact of Economic Circumstances on Risk Aversion

The objective of this paper is to find out whether economic circumstances can have an impact on the level of risk aversion using a sample of data from the Netherlands. The testing strategy is based on the DNB Household Survey, which is issued by CentERdata. Launched in 1993, this database contains panel data up until the year 2011. Using such data allows for the study of psychological as well as economic aspects of financial behaviour of in total 2,000 households. In order to assess how economic circumstances influence an individual’s attitude towards risk, GDP figures from the OECD have been used. Despite other possible indicators, GDP growth rates are employed as they serve as a proxy for the economic circumstances of the country from which the sample has been drawn. The paper’s main finding is the existence of a significant correlation between economic circumstances and the degree of risk aversion. The random effects model, which is employed in the statistical analysis, indicates a negative and significant correlation. Thus, the better off the economy is, the less risk averse individuals will tend to be. Lower risk aversion means individuals will be more willing to take on financial risks. Crucial economic events such as the 2008 financial crisis and the dot.com crisis of 2000 tend to influence individual attitudes towards risk. The model indicates that individuals become more risk averse in the years following such crises