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

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  • Jeffrey V. Butler
  • Luigi Guiso
  • Tullio Jappelli

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.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2011/13.

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Date of creation: 2011
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Handle: RePEc:eui:euiwps:eco2011/13

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Related research

Keywords: Risk Aversion; Risk Ambiguity; Decision Theory; Dual Systems; Intuitive Thinking;

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References

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  1. Gaudecker, H.M. von & Soest, A.H.O. van & Wengstrom, E., 2009. "Heterogeneity in Risky Choice Behavior in a Broad Population," Discussion Paper 2009-12, Tilburg University, Center for Economic Research.
  2. David Ahn & Syngjoo Choi & Douglas Gale & Shachar Kariv, 2008. "Estimating Ambiguity Aversion in a Portfolio Choice Experiment," Levine's Working Paper Archive 122247000000001989, David K. Levine.
  3. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
  4. Sujoy Chakravarty & Jaideep Roy, 2009. "Recursive expected utility and the separation of attitudes towards risk and ambiguity: an experimental study," Theory and Decision, Springer, vol. 66(3), pages 199-228, March.
  5. Fernando Alvarez & Luigi Guiso & Francesco Lippi, 2010. "Durable Consumption and Asset Management with Transaction and Observation Costs," Economics Working Papers ECO2010/04, European University Institute.
  6. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  7. Michèle Cohen & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2011. "An experimental investigation of imprecision attitude and its relation with risk attitude and impatience," Theory and Decision, Springer, vol. 71(1), pages 81-109, July.
  8. Donkers, Bas & Melenberg, Bertrand & Van Soest, Arthur, 2001. " Estimating Risk Attitudes Using Lotteries: A Large Sample Approach," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 165-95, March.
  9. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, 03.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Role of Intuition and Reasoning in Driving Aversion to Risk and Ambiguity
    by Nicholas Gruen in Club Troppo on 2011-04-18 02:00:42
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Jeffrey V. Butler & Luigi Guiso & Tullio Jappelli, 2013. "Manipulating Reliance on Intuition Reduces Risk and Ambiguity Aversion," EIEF Working Papers Series 1301, Einaudi Institute for Economic and Finance (EIEF), revised Jan 2013.
  2. Michèle Cohen & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2011. "An experimental investigation of imprecision attitude and its relation with risk attitude and impatience," Theory and Decision, Springer, vol. 71(1), pages 81-109, July.
  3. Michalis Drouvelis & Julian C. Jamison, 2012. "Selecting public goods institutions: who likes to punish and reward?," Working Papers 12-5, Federal Reserve Bank of Boston.
  4. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  5. Guiso, Luigi, 2009. "A test of narrow framing and its origin," CEPR Discussion Papers 7112, C.E.P.R. Discussion Papers.

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