Seminar – Can Security Design Solve Household Reluctance to Take Risk?

Boris Vallée, Torstein Hagen Associate Professor, Harvard Business School

Using a comprehensive administrative panel of Swedish households, we show how the introduction of capital protected investments and their broad adoption lead to a significant increase in exposure to stock markets for a large share of the population. This effect is significantly more pronounced for households exhibiting a high reluctance to take financial risk before innovation. To rationalise our empirical findings, we develop a lifecycle model and confront a set of utility functions to the data. We find that first order risk aversion with narrow framing (Barberis and Huang 2009) can explain both the increase in the risky share and the heterogeneity we empirically observe. Our results illustrate how security design can mitigate household reluctance to take financial risk.

Speaker bio

Boris Vallée is the Torstein Hagen Associate Professor in the Finance Unit of Harvard Business School. He teaches Real Property in the MBA elective curriculum, and previously taught the Finance II course in the MBA required curriculum. Professor’s Vallée’s research traces the motives behind and the effects of financial innovation in recent decades. He pursues this line of inquiry through empirical studies of corporate finance, household finance, public finance and financial institutions, developing novel data sets and measures. His work has been published in journals such as the Quarterly Journal of Economics and the Review of Financial Studies, and cited by Forbes, The Wall Street Journal and the Boston Globe. He holds a PhD in finance and an MSc in management, both from HEC Paris, and is a CFA Charterholder. Before beginning his doctoral studies, Professor Vallée was an investment banker at Deutsche Bank in London.