Peer effects in risk preferences: Evidence from Germany

Abstract

This study uses data from the German Socio-Economic Panel to analyze peer effects in risk preferences. Empirical evidence on the impact of peer groups on individual willingness to take risks (‘peer effects’) is very limited so far as causality is hard to establish. To establish a causal relationship between individual and community risk preferences, we use an instrumental variables approach where we track the impact of the East–West migration after the German reunification. We find strong support for peer effects in risk preferences. Peer effects seem particularly relevant for women, less educated individuals, the young population, parents, and married individuals. Individuals with higher social interaction tend to have stronger peer effects. Our findings shed light on the origin and stability of risk tolerance and, more generally, on the determinants of economic preferences.