Abstract
We investigate the impact of financial windfalls on household portfolio choices and risk exposure. Exploiting the randomized assignment of lottery prizes in three Swedish lotteries, we find a windfall gain of $100K leads to a 5-percentage-point decrease in the risky share of household portfolios. We show theoretically that negative wealth effects are consistent with both constant and decreasing relative risk aversion and analyze how our empirical estimates help distinguish between competing models of portfolio choice. We further show our results are quantitatively aligned with the predictions of a calibrated dynamic portfolio choice model with non-tradable human capital and consumption habits.