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Time Varying Risk Aversion

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  • Guiso, Luigi
  • Sapienza, Paola
  • Zingales, Luigi

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.

Suggested Citation

  • Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2013. "Time Varying Risk Aversion," CEPR Discussion Papers 9589, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9589
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    More about this item

    Keywords

    Fear; Financial Crisis; Risk Aversion;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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