Shaped by Violence: The Impact of Early Violence Exposure on Financial Risk Preferences

Mateo Uribe Castro, James Byder, Diego Agudelo

Research output: Working paper

Abstract

This paper examines whether growing up in areas with high homicide rates affects financial risk preferences. Our key conjecture is that individuals who have grown up in violent areas possess more risk averse financial preferences. We find support for this hypothesis using a dataset of mutual fund investors from one of Colombia’s largest stock brokers alongside Colombian official data on homicide rates. The likelihood of investing in risky assets is found to be negatively related to violence exposure during early childhood. We address potential identification issues by exploiting the timing of the violent confrontation between the Medellin cartel and the Colombian government between 1984 and 1993 to instrument for the level of violence. We compare investors from Colombia’s biggest cities to investors from Medellin born in a narrow bandwidth around 1984. When we focus exclusively on investors from Medellin, our empirical strategy resembles a fuzzy regression discontinuity design.
Original languageEnglish (US)
StateUnpublished - 2018
Externally publishedYes

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