Abstract
Previous evidence from developed nations has suggested that more trusting individuals are more likely to take financial risks, such as investing in the stock market. Previous studies have found that Chinese citizens have particularly high generalized trust and are more risk-seeking in investment compared with Americans, which makes China an interesting case. The current study examines the relation between generalized trust and stock market participation in China at both a contextual and individual level. Across provinces, a lower level of generalized trust was associated with stock market participation. For example, the stock market participation was four times higher in provinces with the lowest level of perceived fairness than in provinces with the highest level of perceived fairness. The contextual effects of less generalized trust suggest an association between risk-taking behaviors and societal level inequality. At the individual level, trust of strangers was associated with risk preference in highly educated and wealthy people but its effect on risk behaviors was not clear. The findings suggest that trust may affect financial risk-taking behavior at different levels through different pathways, and that cultural differences in understanding of trust also need to be considered.
Highlights
In the literature, there has been a long discussion about the relationship between trust and risktaking (Nickel and Vaesen, 2012)
Three indicators of generalized trust were each negatively associated with stock market participation: fairness (r = −0.58, p = 0.002) (Figure 1), caution (r = −0.49, p = 0.014), and, though less significant, trust (r = −0.32, p = 0.12)
The current study examined the effect of generalized trust on stock market participation in China
Summary
There has been a long discussion about the relationship between trust and risktaking (Nickel and Vaesen, 2012). When deciding whether to trust someone, there is a risk associated with the other person or entity they rely on to cooperate (Cook and Cooper, 2003). Ben-Ner and Putterman (2001) claim that greater risk aversion can lead to less trust between individuals. Research indicates that trusting behavior is associated with betrayal cost (Bohnet and Zeckhauser, 2004). People are more reluctant to rely on a human trustee than on a random device offering the same probabilities in a trust game. If a situation is inherently risky, people would rely more on trusted relationships than they otherwise would (Kollock, 1994)
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