Risk Aversion and Social Networks

Abstract This paper first investigates empirically the relationship between risk aversion and social network structure in a large group of undergraduate students. We find that risk aversion is strongly correlated to local network clustering, that is, the probability that one has a social tie to friends of friends. We then propose a network formation model that generates this empirical finding, suggesting that locally superior information on benefits makes it more attractive for risk averse individuals to link to friends of friends. Finally, we discuss implications of this model. The model generates a positive correlation between local network clustering and benefits, even if benefits are distributed independently ex ante. This provides an alternative explanation of this relationship to the one given by the social capital literature. We also establish a linkage between the uncertainty of the environment and the network structure: risky environments generate more clustered and more unequal networks in terms of connectivity.