Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios

We estimate risk aversion from the actual financial decisions of a sample of 2,168 U.S. investors participating in Lending Club, a person-to-person lending platform. We find a large degree of heterogeneity in the relative risk aversion (RRA) parameter, with an average of 2.85, and a median of 1.62. We exploit the panel dimension of the data to estimate independently the correlation between risk aversion and wealth in the cross section of investors, and the elasticity of risk aversion with respect to changes in wealth for a given investor. Using house prices as an indicator of investor wealth, we find a positive although economically small, correlation between relative risk aversion and wealth in the cross section. In contrast, exploiting the substantial decline in house prices during our sample period and employing investor fixed effect to obtain within-investor estimates, we find that the elasticity is negative and substantial (-4.18). Our estimation procedure allows us to test rationality and consistency of investor behavior.