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The Role of Intuition and Reasoning in Driving Aversion to Risk and Ambiguity

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Abstract

Using a large sample of retail investors as well as experimental data we find that risk and ambiguity aversion are positively correlated. We provide evidence that a common link is decision mode: intuitive thinkers tolerate more risk and ambiguity than effortful reasoners. One interpretation is that intuitive thinking confers an advantage in risky or ambiguous situations. We present supporting lab and field evidence that intuitive thinkers outperform others in uncertain environments. Finally, we find that risk and ambiguity aversion vary with individual characteristics and wealth. The wealthy are less risk averse but more ambiguity averse, which has implications for financial puzzles.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 282.

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Date of creation: 05 Apr 2011
Date of revision: 15 Jan 2013
Handle: RePEc:sef:csefwp:282

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

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References

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  1. 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.
  2. Fernando E. Alvarez & Luigi Guiso & Francesco Lippi, 2010. "Durable consumption and asset management with transaction and observation costs," NBER Working Papers 15835, National Bureau of Economic Research, Inc.
  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. Hans-Martin von Gaudecker & Arthur van Soest & Erik Wengstrom, 2011. "Heterogeneity in Risky Choice Behavior in a Broad Population," American Economic Review, American Economic Association, vol. 101(2), pages 664-94, April.
  5. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
  6. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  7. 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.
  8. Michèle Cohen & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2009. "An experimental investigation of imprecision attitude and its relation with risk attitude and impatience," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00389674, HAL.
  9. 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.
  10. 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.
  11. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, 03.
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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
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Cited by:
  1. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  2. 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.
  3. Guiso, Luigi, 2009. "A test of narrow framing and its origin," CEPR Discussion Papers 7112, C.E.P.R. Discussion Papers.
  4. 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.
  5. Butler, Jeffrey V. & Guiso, Luigi & Jappelli, Tullio, 2013. "Manipulating reliance on intuition reduces risk and ambiguity aversion," CFS Working Paper Series 2013/13, Center for Financial Studies (CFS).

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