Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions

Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions (July 2017) Chen Lian, Yueran Ma, and Carmen Wang. SSRN version. My summary is from earlier, 2016 version.


In recent years, interest rates reached historic lows in many countries. We document that individual investors “reach for yield,” that is, have a greater appetite for risk taking when interest rates are low. Using an investment experiment holding fixed risk premia and risks, we show that low interest rates lead to significantly higher allocations to risky assets, among MTurk subjects and HBS MBAs. This behavior cannot be easily explained by conventional portfolio choice theory or by institutional frictions. We then propose and test explanations related to investor psychology. We also present complementary evidence using historical data on household investment decisions.

We provide evidence that individual investors “reach for yield”, that is, have a greater appetite for risk taking in low interest rate environment (…) We find significantly higher allocations to risky assets in the low rate condition.

Experiments (N=400) with 2 groups, allocate $100.000 between ;
[groep 1] risk free = 5% vs risky asset = 10%
[groep 2] risk free = 1% vs risky asset =6% (investment horizon = 1 year).
We show that individuals demonstrate a stronger preference for risky assets in their investment decisions when the risk-free rate is low. (…) The difference is about 7 to 9 percentage points, on a basis of roughly 60% allocations to the risky asset.


Why? (what mechanisms?)

  • People may form reference points of investment returns. we find that there is significant reaching for yield behavior when interest rates are below 3%, whereas investment decisions are not significantly different when interest rates are above this level. This cut-off seems consistent with the level of interest rates that most participants are used to prior to recent years
  • Salience of the higher average returns on the risky asset in different interest rate environment. Most simply, 6% average returns relative to 1% risk-free returns is more salient than 10% average returns relative to 5% risk-free returns. Reaching for yield behavior is dampened if investment returns are completely framed in gross terms (e.g. instead of saying 5% returns, we say that one will get 1.05 units for every unit of investment).


In the 2017 version they made the graph that I had made myself in my 2016 summary:


Section 5: Suggestive Evidence from Observational Data: the data suggest that portfolio shares of stocks and flows into risky assets increase (while portfolio shares of safe assets and flows into deposits fall) when interest rates decrease. (p.28)

  • In terms of magnitude, a one percentage point decrease in interest rates is associated with about 1.5 percentage points increase in allocations to stocks and a similar size fall in allocations to “cash”.
  • Interestingly, the magnitude of allocations’ response to interest rates seems to be similar in the experiment and in the observational data. (p.29)
  • We see that across different data sources, decreases in interest rates are associated with flows into risky assets and out of safe interest-bearing assets. (p30)
  • we hold the findings in this section 5 to be merely suggestive and complementary to our experimental evidence, yet we are intrigued that data across several different sources show consistent patterns.


Other interesting bits:

  • P1: A number of papers also provide empirical evidence that banks, money market mutual funds, and corporate bond mutual funds invest in riskier assets when interest rates are low (Maddaloni and Peydr_o, 2011; Jim_enez, Ongena, Peydr_o, and Saurina, 2014; Chodorow-Reich, 2014; Hanson and Stein, 2015; Choi and Kronlund, 2015; Di Maggio and Kacperczyk, 2016).
  • footnote 1, p1: The \reaching for yield” behavior we study in this paper, most precisely, is that people invest more in risky assets when interest rates are low, holding constant the risks and excess returns of risky assets.
  • Footnote 3, p5: For example, Di Maggio and Kacperczyk (2016) and Choi and Kronlund (2015) show that money market mutual funds and corporate fund mutual funds who reach for yield get larger in inflows, especially when interest rates are near zero. These inflows most likely come from yield seeking end investors. It seems plausible that households’ yield seeking behavior could be an important cause of some financial institutions reaching for yield.
  • P5: our evidence on risk taking and interest rate environment may also have implications for security design and consumer protection, as households’ biases could be exploited by institutions and asset managers that highlight returns and shroud risks (C_el_erier and Vall_ee, 2016).
  • P10-11 In our data, Harvard Business School MBAs and MTurk workers reach for yield by a similar degree. Nor do we find that reaching for yield declines with wealth, investment experience, or education among MTurks, or with investment and work experience in finance among MBAs
  • P32 The impact of the interest rate environment on investor behavior could have important implications for connections between key macroeconomic issues and capital market dynamics and financial stability.

The Psychology of Advertising [Book]

The Psychology of Advertising by Bob M. Fennis & Wolfgang Stroebe.

My rating: 3 of 5 stars

A book written because there was no good book on this topic. A primer on persuasion for advertising people (and text book for university); Elaboration Likelihood Model (ELM) by Petty, and Ajzen. Not yet definitive answer to Chapter 6’s title “How advertising influences buying behavior”


Alpha strategies: approach motivation – Omega strategy: avoidance motivation (p.11).

How advertising works: what do we really know? Vakratsas & Ambler – The Journal of Marketing, 1999.

p36 DAGMAR model (Defining Advertising Goals for Measured Advertising Results),
9 effects of advertising in hierarchical order:

  • Category need
  • Brand awareness
  • Brand knowledge/comprehension
  • Brand attitude
  • Brand purchase intention
  • Purchase facilitation
  • Purchase
  • Satisfaction
  • Brand loyalty

p80-81 Four stages involved in the process of information acquisition and processing:

  1. preattentive analysis
  2. focal attention (salience, vividness, novelty)
  3. comprehension
  4. elaborative reasoning

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Week van Wilte in tweets #30

Weer loop ik achter. Volgende week is er geen wvwit, dus ik verwacht dat #31 op tijd is, op maandag 24 juli. Met dit keer in #30: Psychologencongres, FCA jaarverslag, Pensioen, Schoolfotoschadevergoeding en Shortsellregister.


Binnen een week had Bart Schutz een sessie in elkaar gezet voor het European Congress of Psychology. Ook ik mocht er wat vertellen.

Goede opkomst, ondanks het feit dat het last-minute was en niet in het gedrukte programma stond

Veel discussie over ethiek

Zie ook:

Financial Conduct Authority (FCA)

FCA publiceerde jaarverslag, hun jaar loopt van april tot april. Interessante punten over effectmeting. En bonussen bij de Engelse toezichthouder.


In januari dit jaar publiceerde de AFM een verkeerde versie van het short sell register, met ook geheime posities. In ESB een artikel van wetenschappers die het effect op de markt onderzochten van deze nieuwe informatie.


Gebeurde ook weer allerlei relevante dingen

Nadere informatie over het Blackrock onderzoek waaruit bleek dat 52% Nederlanders geen werknemerspensioen opbouwt


Ik begrijp de uitspraak niet en ben het helemaal met Sywert van Lienden eens.

En ik volg dus niet de redenering van NRC

Ook de taalpuristen zien fouten in NRC commentaar

Week van Wilte in tweets #29

Enigszins slipping, nu pas woensdagavond dat ik vorige week in tweets samenvat.

Ethisch dilemma

Ben er nog niet uit wat ik zou doen. Wel interessante casus

Limieten van de markt

Interessant interview met Paul de Grauwe. Mijn review van zijn boek De limieten van de markt. Goed en genuanceerd boek (maar na lezen interview heb je ook wel beeld van zijn standpunten).

Boete Google

Ik ben het wel eens met Voorhuis.

Neuro skepsis

Unrelated, maar Twitteraar @Neuro_Skeptic is zeker volgen waard.

Wetenschappelijk discours

en over peer review:


Beleggen en webbezoek

Interessante cijfers van de FCA over wat bezoekers op de website van hun broker doen. Lijkt niet erg kostenbewust.

Review: Darwin’s Unfinished Symphony: How Culture Made the Human Mind

Darwin's Unfinished Symphony: How Culture Made the Human Mind
Darwin’s Unfinished Symphony: How Culture Made the Human Mind by Kevin N Laland

My rating: 4 of 5 stars

The breadth of the Laland lab is incredible. This book is crammed with research, experiments and models by Laland and co-workers. They work on things like social learning (animals are social learning specialists, evolved for specific function; humans are learning generalists, can generalize across domains), evolution of intelligence, gene-culture coevolution, and cooperation.

Laland is also well know because of niche construction; “Through our culture we have built our own world, but that is only possible because our minds are fashioned for culture” (p282).

The chapters I enjoyed most were Chapter 3 on the social learnings strategies tournament with Luke Rendell. See 2010 Science paper Why Copy Others? Insights from the Social Learning Strategies Tournament. “Copying beat asocial learning hands down over virtually all plausible conditions” (p69). “The selective performance of behavior by the copied individual [not randomly chosen, but rather a select, tried-and-tested, high-payoff behavior] is what makes social learning so profitable to the copier.” (p71).

And chapter 4 on the threespine and the ninespine sticklebacks (=fish). “Ninespines are capable of exploiting public information, while their close relatives, the threespines, were not” (p81). Public info in this case is the feeding rate of other fish (3 or 9 spine, doesn’t matter) to determine richness of a feeding patch. Threespines are less vulnerable out in the open (their spines do protect them), so they can learn asocially (ie on their own); that is often too dangerous for ninespines, hence the evolution to use public information. And ninespines prefer public information over social cues, because it is more reliable. What looks like a interesting paper; “Nine-spined sticklebacks exploit the most reliable source when public and private information conflict” (2004).

p118, based on work by Louis Lefevbre; “Natural selection may have favored innovativeness as a part of a survival strategy based on flexibility – that is, the flexibility to cope with unpredictable or changing environments and to alter their behavior to outcompete others. Perhaps selection for innovativeness could be driving brain enlargement over evolutionary time.”

The longest recorded utterance of Nim Chimpsky, the chimpanzee taught sign language by Herbert Terrace was ‘Give orange me give eat orange me eat orange give me eat orange give me you.’ Chimpanzees, bonobos, and gorillas seem to make rather poor conversationalists (p178)

p193 Mark Pagel quote: “language evolved as a trait for promoting cooperation”

p240 “Hunter-gatherers are effectively trapped in a vicious cycle that severely constrains their rate of cultural evolution”. Because they have to move a lot, they don’t develop/use heavy tools. And they have to space their offspring, because a mother can only carry one child at a time when moving around.

Couple of interesting papers:
p100: Herring gulls drop rabbits from cliffs to kill/drown them and eat them (Young, 1987, Herring gull preying on rabbits)
p106: Crows use passing cars to open nuts (Nihei, 1995. Variations of behaviour of carrion crows Corvus corone using automobiles as nutcrackers
p106 thieving birds stealing quarters from a car wash
p280: Humans are more likely to copy an action that is performed by three individuals one time each, than an action performed by one individual three times. Haun et al (2012)Majority-Biased Transmission in Chimpanzees and Human Children, but Not Orangutans

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