Selection, Socialization, and Risk Preferences in the Finance Industry: Longitudinal Evidence for German Finance Professionals

Abstract

The financial sector plays a crucial role in society. Consequently, prior research has examined the preferences of professionals working in finance. However, these studies have tended to be cross-sectional and have neglected the dynamic roles played by (self-)selection and socialization. This paper uses longitudinal data from Germany to examine how individuals’ financial risk preferences affect their likelihood of starting and stopping work as a finance professional. Additionally, this work studies how socialization in the finance industry affects financial risk preferences. Our results indicate that individuals who are more risk tolerant are more likely to enter the finance industry, but their risk preferences do not affect their likelihood of exiting the industry. Furthermore, socialization in the finance industry does not appear to significantly strengthen finance professionals’ financial risk preferences. We conclude that the average financial risk preferences of finance professionals are mostly shaped by individuals entering the industry. As such, policies aimed at changing risk preferences in the finance industry should be targeted at recruitment, at least in Germany. This study has important practical implications for the finance industry, as it suggests that recruitment policies can play a crucial role in shaping the risk preferences of finance professionals.