We investigate the strict-exogeneity assumption, a necessary condition for estimator consistency in many finance panel-data applications. We outline tests for strict exogeneity in both traditional (non–instrumental variable (IV)) and IV settings. When we apply these tests in common traditional finance panel regressions, we find that the strict-exogeneity assumption is often strongly rejected, suggesting large inference errors. We test for strict exogeneity in specific finance panel-data IV settings and illustrate the potential for these tests to help confirm, or rule out, the validity of common panel-data IV estimators. We offer recommendations to address the strict-exogeneity issue in finance research.

We conduct a controlled laboratory experiment in the spirit of Merton (1971), in which subjects dynamically choose their portfolio allocation between a risk-free and risky asset. Using the optimal allocation of an investor with hyperbolic absolute risk aversion (HARA) utility, we fit the experimental choices to characterize the risk profile of our participants. Despite substantial heterogeneity, decreasing absolute risk aversion and increasing relative risk aversion are the predominant types. We also find some evidence of increased risk taking after a gain. Finally, the session level risk attitudes show a different profile than the individual descriptions of risk attitudes.