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Trauma and Financial Risk Taking

Do Psychological Shocks Affect Financial Risk Taking Behavior? A Study of U.S. Veterans

Do Psychological Shocks Affect Financial Risk Taking Behavior? A Study of U.S. Veterans

Individuals that have combat experience are less likely to invest in risky asset

It is important to consider how traumatic life experiences can bias financial decision making behavior in regard to determining and managing veterans’ benefits

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Vicki Bogan, David Just and Brian Wansink (2013). Do Psychological Shocks Affect Financial Risk Taking Behavior? A Study of U.S. VeteransContemporary Economic Policy 31 (3), 457-467. doi: 10.1111/j.1465-7287.2012.00319.x

Trauma and Financial Risk Taking, Bogan, Just, 2013, Contemporary Economic Policy, Psychological Shocks, veterans, investment behavior, Food and Brand Lab, Brian Wansink, Cornell University

Experiencing a trauma or psychological shock such as a war or natural disaster has been associated with significant long-term mental health issues and has been shown to influence a variety of human behaviors. Specifically, recent evidence shows that experiencing certain types of financial shocks can have an effect on an individual's risk taking behavior. For instance, it has been shown that experiencing a macroeconomic shock affects an individual's willingness to take financial risks and to make certain types of financial investments.

We analyze how traumatic experiences that are not directly connected to the financial sector affect investment behavior. Using combat experience as a proxy for all non-finance related traumatic experiences; we explore how combat experiences influence the probability of veterans investing in risky financial assets. After controlling for physical health issues and other individual characteristics that have previously been shown to influence investment behavior, we find that combat is associated with a 14 - 18 percent decrease in the probability of veterans holding risky assets (stock and mutual funds) and find no significant correlation between combat experience and the probability of veterans holding safe assets.

Given portfolio choices of stock historically have been critical to economic advancement and wealth-building, combat could influence veteran preferences for financial risk taking in a sub-optimal manner. Hence, this suggests that the combat experiences of veterans are important to consider with regard to determining and managing veterans benefits. More generally, since our results cannot be explained as a response to a shock that provides increased economic or financial information, our paper also provides insights into how traumatic life experiences can bias financial decision making behavior.

Summary by Vicki L. Bogan