Understanding when households are disposed to make risky decisions is a question of great interest for economists, sociologists, and behavioral scientists. As daily life becomes increasingly complicated, the need to make choices and decisions arises more frequently. Whether buying a new apartment, making a financial investment or accepting a lucrative job offer – individuals confront significant decisions almost every day, in various forms. One thing that all decisions share is an association with a certain amount of risk and a potential impact on individuals’ personal circumstances.
People often carefully weigh whether risks should be taken and what consequences they might have. As a result, a single person thinks differently than the head of a family, who has a responsibility as a household provider. To safeguard against risks, many households seek a form of protection against possible losses. The question at hand is whether the social support produces an increased feeling of security and, by extension, an enhanced inclination to financial risk-taking. Concretely, I peruse the research questions if households that can rely on a form of social assistance (I) possess a higher financial risk tolerance and, in conclusion, (II) invest their money more strongly in the equity market. The thesis extends the literature regarding the determinants of stock holding and provides one of the first investigations exploring in greater detail the role of the households’ social environment and its repercussions on risky investment behavior.
Table of Contents
1. Introduction
2. Social network structures as a “cushion” against various risks
2.1 The pivotal role of informal finance in developing markets
2.2 Risk-sharing agreements between households
2.3 Insurance within family networks
2.4 Cultural influences on decision-making under risk
3. The consequences of social support on the financial risk-taking of households
3.1 Social finance
3.2 The interplay of individual risk tolerance and stock market participation
4. Methodology
4.1 Hypotheses
4.1.1 Hypothesis 1
4.1.2 Hypothesis 2
4.2 The Panel on Household Finances (PHF)
4.3 Summary statistics
5. Empirical analysis
5.1 Regression results
5.1.1 Financial risk tolerance
5.1.2 Stock ownership
5.1.3 Stock percentage of financial assets
5.2 Robustness check
5.3 Limitations of the empirical research
6. Conclusion
Research Objectives and Themes
This master's thesis aims to investigate the influence of social environment support networks on the financial decision-making behavior of households in Germany. The primary research question addresses whether households that can rely on social backing (e.g., from family and friends) exhibit higher financial risk tolerance and consequently show a higher propensity to invest in the stock market.
- The impact of informal financial support and social networks as a "cushion" against risks.
- Empirical analysis of risk-taking behavior in the context of the Panel on Household Finances (PHF).
- The relationship between familial/social support and individual stock ownership decisions.
- Evaluation of potential differences in financial behavior between socially embedded and "unprotected" households.
Excerpt from the Book
2.2 Risk-sharing agreements between households
No one can foresee what risks will affect them, or to what extent; but everyone has their own way of dealing with potential perils. In large parts of the world, the social network takes the role of an insurance channel against external events. For example, labor pooling is a common practice to insure households against severe health risks. In a labor-pooling arrangement, neighbors or the community assist with workforce when one is absent due to illness and when there is a heavy reliance on the completion of time-sensitive tasks. Furthermore, the extended family helps with unemployment shocks by providing information about new job opportunities. Another form of insurance was witnessed by Dercon et al. (2006) in Africa, where funeral societies foster children in the wake of a sudden parental death or offer a way to deal with expensive funeral costs. Above all, it is in poorer households where social network support is essential. As indicated in the previous chapter, households are not able to enjoy a steady income flow, because most of them make their living from agriculture, where fluctuations in weather or commodity prices directly translate into temporary income shocks.
Given this setting, it is astonishing that even though household income varies greatly, consumption is noticeably smooth. Thus, a virtue was made out of necessity, and households came up with a myriad of mechanisms to counteract income shocks.
Summary of Chapters
1. Introduction: Outlines the significance of households' financial decision-making and introduces the research thesis regarding social support networks as a financial "cushion".
2. Social network structures as a “cushion” against various risks: Provides a comprehensive literature review on how informal finance and social networks mitigate risk in daily life and intergenerational settings.
3. The consequences of social support on the financial risk-taking of households: Examines how social learning and peer effects influence financial behavior and discusses the relationship between risk tolerance and stock market participation.
4. Methodology: Details the formulated hypotheses and describes the dataset (PHF) used, alongside descriptive statistics of the analyzed sample.
5. Empirical analysis: Presents the regression results concerning financial risk tolerance, stock ownership, and the proportion of financial assets, including robustness checks and research limitations.
6. Conclusion: Summarizes the key findings, confirming that social support networks positively influence household financial risk tolerance and stock market investment in Germany.
Keywords
Household Finance, Social Support, Risk Tolerance, Stock Market Participation, Cushion Hypothesis, Informal Finance, Panel on Household Finances, PHF, Risk-sharing, Investment Behavior, Financial Decision-making, Social Networks, Germany, Empirical Analysis, Regression Models.
Frequently Asked Questions
What is the core focus of this master's thesis?
The thesis focuses on how the social environment and support networks of households, such as family and friends, impact their financial risk-taking behavior and investment decisions in the stock market.
Which central themes are analyzed in the work?
Key themes include informal financial risk-sharing, the concept of a "cushion" provided by social networks, intergenerational financial transfers, and the influence of cultural backgrounds on financial risk preferences.
What is the primary research goal?
The primary goal is to empirically test whether households that feel socially insured against financial loss exhibit a higher degree of financial risk tolerance and a greater likelihood of owning stocks.
What scientific methodology is utilized?
The research utilizes multiple regression analyses—specifically ordered logit, logit, and fractional logit models—applied to the German Panel on Household Finances (PHF) dataset to test the hypotheses.
What does the main body of the work cover?
It covers theoretical frameworks on social insurance, an analysis of the PHF data, the empirical estimation of the relationship between social support and financial decisions, and robustness tests using the Lewbel (2012) methodology.
How can this research be characterized by keywords?
It is best characterized by terms like Household Finance, Risk Tolerance, Social Support, Stock Market Participation, and the Cushion Hypothesis.
How does the "cushion hypothesis" apply to the German financial market?
The thesis applies the "cushion hypothesis" to explain why socially supported households in Germany, despite the country's generally conservative financial landscape, might be more inclined to take financial risks because they have a fallback option in times of financial distress.
What role does the Panel on Household Finances (PHF) play in this study?
The PHF serves as the primary, representative data source for German households, providing the necessary quantitative and qualitative data on financial assets, investment behavior, and social support links to perform the empirical analysis.
- Citar trabajo
- Tobias Ritter (Autor), 2019, The social environment of households and its impact on financial decision-making, Múnich, GRIN Verlag, https://www.grin.com/document/516639
