Risk Taking Begets Risk Taking: Evidence from Casino Openings and Investor Portfolios

Abstract

In this study, we show that individuals’ non-investment risk-taking behavior can affect their willingness to take financial risks. Risk taking itself is an activity that induces strong emotional responses; we posit that the very act of taking risks may induce excitement, which Kuhnen and Knutson (2011) previously show can induce greater financial risk taking. To test this hypothesis, we identify a very specific setting where a subset of investors is more likely to be exposed to increased risk taking through gambling. Using the initial legalization and opening of commercial casinos in the U.S. as a natural experiment, we show that the opening of a casino in close geographical proximity to investors results in increased risk taking in the portfolios of those investors who are likely to visit the casino to gamble relative to those investors who are not. These likely gamblers, who are exposed to increased risk taking, subsequently realize higher returns, but do not improve the overall mean-variance efficiency of their portfolios. These findings provide insight into the nature of risk taking and the amplifying effect that taking risks in one context may have on financial risk taking.