WORK IN PROGRESS
WORK IN PROGRESS
Risk Aversion in the Shadow of Terror
Graeber, D., Meister L., and Murray, N. (2024). “The Effect of Terror on Risk Attitudes”. (Unpublished Manuscript).
Abstract: Economic literature highlights the disproportionate high economic impacts of terror attacks, relative to the immediate damage inflicted by these attacks. This puzzle warrants a better understanding of the precise mechanisms driving this phenomenon. Utilizing data from the Global Terrorism Database and rich geocoded data on risk preferences, we apply a difference-in-differences approach to compare individuals residing within a 25-kilometer radius of an attack to those living further away. Our findings indicate that terror attacks cause an immediate and notable decline in risk preferences in the treatment group. The extent of this effect varies with the sentiment and reach of news coverage on the attack. Additionally, we observe shifts in risky behaviors, including a reduced likelihood of self-employment or stock ownership. We further show that diminished happiness mediates the relationship between terror exposure and changes in risk preferences. These results imply that shifts in risk preferences may contribute to the broader economic costs of terrorism.
Parental Risk Preferences and Investments into Children’s Human Capital
Graeber, D. and Murray, N. (2025). “Parental Risk Preferences and Investments into Children's Human Capital”. (Unpublished Manuscript).
Abstract: This study examines how parental risk preferences influence investments in young children’s human capital. A theoretical framework is developed using a two-period overlapping generations (OLG) model with altruistic parents and an explicit human capital production function. The model predicts that under uncertainty about returns, risk-averse parents engage in precautionary investments during early childhood to hedge against future adverse outcomes. This prediction is tested empirically using data from the German Socio-Economic Panel, focusing on parental reports of developmental activities for children aged 2–3 and 5–6. Risk preferences are proxied by self-reported willingness to take risks. The results show no significant relationship between maternal risk preferences and investment at ages 2–3. However, at ages 5–6, a one standard deviation increase in maternal willingness to take risks is associated with a 0.22 standard deviation decrease in investment. This aligns with the model’s prediction that risk aversion encourages precautionary behavior. No significant associations are found for paternal risk preferences. Further analyses reveal that the relationship is non-linear and concentrated in the upper tail of the investment distribution, and is strongest among older, more educated, and lower-income mothers. These findings underscore the role of parental risk attitudes in shaping early childhood investment decisions under uncertainty.
Risk Preferences and Unexpected Wealth Shocks: Evidence from Inheritances
Murray, N. (2025). “Risk Preferences and Unexpected Wealth Shocks: Evidence from Inheritances”. (Unpublished Manuscript).
Abstract: This paper investigates the causal impact of positive wealth shocks on individual risk preferences, using longitudinal data from the German Socio-Economic Panel. Focusing on inheritances as a source of exogenous wealth variation, the analysis employs a staggered difference-in-differences approach that exploits the random timing of parental death among a homogeneous sample of individuals who all eventually receive a substantial inheritance. To minimize anticipation effects, the study concentrates on younger heirs for whom inheritances are less likely to be expected, using age at inheritance as a proxy for anticipation. A placebo analysis using individuals who lose a parent but receive little or no inheritance helps isolate the effect from bereavement-related shocks. The results indicate that young heirs become significantly more risk-averse following an inheritance, with this effect persisting for up to four years. The increase in risk aversion is most pronounced among individuals with lower wealth and educational attainment, suggesting a role for financial literacy in shaping responses to wealth shocks. Placebo tests confirm that emotional responses to parental death do not drive the results, and the findings are robust to multiple sensitivity checks. While receiving an inheritance leads to a modest rise in stock market participation, mediation analysis reveals that this behavioral shift is not attributable to the observed changes in risk preferences.