Impact of Traumatic Life Events on Risk Behavior

Using data from the Dutch Longitudinal Internet Studies for the Social Sciences (LISS) panel, this paper analyzes whether traumatic events that are individually experienced in daily life such as sickness, violence, loss of a loved one have an effect on risk attitude. It also includes mediating factors of trauma to analyze the relationship, i.e. recency, severity and frequency. In agreement with previous studies, exposure to trauma induces higher levels of risk aversion. Two individual-specific events are associated with higher risk aversion: having experienced life-threatening illness and death of a loved one. The first one has a bigger tendency (7.7%) to become more risk averse than the second one (5.2%). The separating and/or divorcing parents only have an effect on risk aversion if this trauma is frequently experienced, and also the more often this trauma is experienced, the higher the levels of risk aversion. Other than this significant association, the impacts of other mediating factors seem to be ambiguous. This paper provides support to similar studies, which suggests that idiosyncratic negative life events should be considered as important as large-scaled traumatic events (e.g. financial crises), since the impact of those traumas on risk-taking behavior is comparable in terms of magnitude.