Low Interest Rates and Risk-Taking: Evidence from Individual Investment Decisions

How do low interest rates affect investor behavior? We demonstrate that individuals reach for yield, that is, have a greater appetite for risk-taking when interest rates are low. Using randomized investment experiments holding fixed risk premiums and risks, we show low interest rates lead to significantly higher allocations to risky assets among diverse populations. The behavior is not easily explained by conventional portfolio choice theory or institutional frictions. We then propose and provide evidence of mechanisms related to investor psychology, including reference dependence and salience. We also present results using observational data on household investment decisions.