On the Origins of Financial Development: Ancestral Population Diversity and Financial Risk-Taking

Abstract

We show that risk-taking originates in preindustrial ancestral population diversity. We use data on immigrants residing in the United States and show that controlling for all known determinants of portfolio decisions, diversity positively affects stock market participation and asset allocation but not the ownership of bonds or savings accounts. The diversity effect relates to the level of individualism and knowledge in the origin country. Nevertheless, diversity is significant in the presence of more than 100 control variables or when instrumenting diversity with plant variety. Overall, deep-rooted factors unrelated to contemporary social and economic conditions affect risk-taking.