Time Varying Risk Aversion

Luigi Guiso, Luigi Zingales and Paola Sapienza

No 9589, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use a repeated survey of an Italian bank?s clients to test whether investors? risk aversion increases following the 2008 financial crisis. We find that both a qualitative and a quantitative measure of risk aversion increases substantially after the crisis. After considering standard explanations, we investigate whether this increase might be an emotional response (fear) triggered by a scary experience. To show the plausibility of this conjecture, we conduct a lab experiment. We find that subjects who watched a horror movie have a certainty equivalent that is 27% lower than the ones who did not, supporting the fear-based explanation. Finally, we test the fear-based model with actual trading behavior and find consistent evidence.

Keywords: Fear; Financial crisis; Risk aversion (search for similar items in EconPapers)
JEL-codes: D1 D8 G11 G12 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-ban, nep-exp, nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (106)

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Journal Article: Time varying risk aversion (2018)
Working Paper: Time Varying Risk Aversion (2013)
Working Paper: Time Varying Risk Aversion (2013)
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