“Superstition and risk-taking: Evidence from “zodiac year” investment in China” by Dr. Yongxiang Wang
Dr. Yongxiang Wang
Associate Professor of Finance
Marshall School of Business
University of Southern California
Risk-taking in standard models is presumed to result in part from subjective probability assessments, without necessarily modeling the source of probability weights. We show that superstitions – beliefs without scientific grounding – have material consequences for Chinese individuals’ risk-taking behavior, using evidence from corporate as well as individual decisions, exploiting the widely held belief in bad luck during one’s “zodiac year,” which occurs every 12 years. We first document that risky investments – in particularly R&D and corporate acquisitions – decline in a chairman’s zodiac year (15 and 24 percent respectively). We show in event plots that the effect is unique to the chairman’s zodiac year. To provide individual-level evidence on risk avoidance in zodiac years, we show, using data from a large private insurance firm, that insurance purchases are 3 percent higher in a customer’s zodiac year, and also the year prior (as would be predicted by precautionary motives). Finally, using the 2013 China Household Finance Survey, we provide evidence that zodiac year respondents are 5 percent more likely to favor no-risk investments. Overall, our results indicate the important role of cultural beliefs in determining economically relevant decisions.