Three Essays on the Risk-taking Behaviour of Individuals

Abstract

This thesis focuses on the impact of three behavioural biases on individuals’ risk-taking behaviours, namely the disposition effect, partisan bias and ambiguity aversion. The first and third empirical chapters offer crucial extensions to the behavioural finance literature by employing a proprietary dataset of 1.6 million individual investors spanning the period from January 2007 and July 2009. The second empirical chapter has important policy implications for COVID-19 mitigation during a public health crisis.

The first empirical chapter examines whether individual investors’ early-life exposure to the Great Chinese Famine (GCF) causes them to be more loss averse. Several findings emerge. First, this chapter demonstrates that individuals with early-life GCF exposure exhibit a higher degree of loss aversion than those without such exposure. Second, early-life GCF exposure significantly impacts individuals’ loss aversion during adverse market conditions. Finally, this chapter finds that the degree of early-life GCF exposure (severe/less severe) and not just the GCF exposure causes individuals to be more loss averse when facing future adversity.

In the second empirical chapter, this thesis examines whether, and to what extent, the Presidential COVID-19 sentiment (PCS), constructed based on former President Trump’s tweets, influenced the public’s risk perception of COVID-19. This chapter finds that, during the COVID-19 pandemic, PCS was negatively associated with social distancing behaviours in Republican counties owing to confirmation bias yet was positively associated with social distancing behaviours in Democratic counties due to aberration bias. This chapter supports the view that individuals’ risk perception is influenced by the information received from politicians through social media, with the impact exhibiting variations with respect to their positions on the political spectrum.

In addition, the final empirical chapter examines whether market ambiguity affects the risk-taking behaviours of investors and shows how this effect takes shape. This empirical evidence reveals that individuals tend to trade more and trade out of risky securities when market ambiguity increases. Increasing ambiguity leads to a decrease in the share of risky assets within individual investors’ portfolios. More specifically, individual investors tend to show aversion to ambiguity for gains and love to ambiguity for losses.