Abstract
In recent years, many central banks have set benchmark interest rates to historic lows. In this paper, we provide evidence that individual investors reach for yield, that is, have a greater appetite for risk taking in such low interest rate environment. We first document this phenomenon in a simple investment experiment, where investment risks and risk premia are held constant. We find significantly higher allocations to risky assets in the low rate condition, among MTurks as well as HBS MBAs. This reaching for yield behavior is unrelated to institutional frictions, and cannot be easily explained by conventional portfolio choice theory. We then propose and provide evidence for two sets of explanations related to people's preferences and psychology. We also present complementary evidence using historical data on individual investors' portfolio allocations and household investment flows.
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