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

  • Butler, Jeff
  • Guiso, Luigi
  • Jappelli, Tullio

Using a large sample of retail investors as well as experimental data we find that risk and ambiguity aversion are positively correlated. We show the common link is decision style: 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8334.

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Date of creation: Apr 2011
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Handle: RePEc:cpr:ceprdp:8334
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