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

  • Jeffrey V. Butler

    (EIEF)

  • Luigi Guiso

    (European University Institute and EIEF)

  • Tullio Jappelli

    (University of Naples Federico II and CSEF)

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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File URL: http://www.eief.it/files/2012/09/wp-07-the-role-of-intuition-and-reasoning-in-driving-aversion-to-risk-and-ambiguity.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1107.

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Length: 48 pages
Date of creation: 2011
Date of revision: Oct 2011
Handle: RePEc:eie:wpaper:1107
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