The role of intuition and reasoning in driving aversion to risk and ambiguity

Jeffrey Butler, Luigi Guiso and Tullio Jappelli ()

No ECO2011/13, Economics Working Papers from European University Institute

Abstract: Using information on a large sample of retail investors and experimental data we find that risk aversion and risk ambiguity are correlated: individuals who dislike risk also dislike ambiguity. We show that what links these traits is the way people handle decisions. Intuitive thinkers are less averse to risk and less averse to ambiguity than individuals who base their decisions on effortful reasoning. We confirm this finding in a series of experiments. One interpretation of our results is that the high-speed of intuitive thinking puts intuitive thinkers at a comparative advantage in situations involving high risk and ambiguity, making them less averse to both. Consistent with this view we show evidence from the field and from the lab that intuitive thinkers perform better than deliberative thinkers when making decisions in highly ambiguous and risky environments. We also find that attitudes toward risk and ambiguity are related to different individual characteristics and wealth. While the wealthy are less averse to risk, they dislike ambiguity more, a finding that has implications for financial puzzles.

Keywords: Risk Aversion; Risk Ambiguity; Decision Theory; Dual Systems; Intuitive Thinking (search for similar items in EconPapers)
JEL-codes: D81 D83 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: The role of intuition and reasoning in driving aversion to risk and ambiguity (2014)
Working Paper: The Role of Intuition and Reasoning in Driving Aversion to Risk and Ambiguity (2013)
Working Paper: The role of intuition and reasoning in driving aversion to risk and ambiguity (2011)
Working Paper: The role of intuition and reasoning in driving aversion to risk and ambiguity (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2011/13

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