Time Varying Risk Aversion
We use a repeated survey of a large sample of clients of an Italian bank to measure possible changes in investors’ risk aversion following the 2008 financial crisis. We find that both a qualitative and a quantitative measure of risk aversion increase substantially after the crisis. These changes are correlated with changes in portfolio choices, but do not seem to be correlated with “standard” factors that affect risk aversion, such as wealth, consumption habit, and background risk. This opens the possibility that psychological factors might be driving it. To test whether a scary experience (as the financial crisis) can trigger large increases in risk aversion, we conduct a lab experiment. We find that indeed students who watched a scary video have a certainty equivalent that is 27% lower than the ones who did not. Following a sharp drop in stock prices,a fear model predicts that individuals should sell stocks, while the habit model has the opposite implications; people should actively buy stocks to bring the risky assets to the new optimal level. We show that after the drop in stock prices in 2008 individuals rebalanced their portfolio in a way consistent to a fear model.
|Date of creation:||2013|
|Date of revision:||Sep 2013|
|Contact details of provider:|| Postal: Via Sallustiana, 62 - 00187 Roma|
Phone: +39 066790013
Fax: +39 0647924872
Web page: http://www.eief.it/repec
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Guiso, Luigi & Paiella, Monica, 2001.
"Risk Aversion, Wealth and Background Risk,"
CEPR Discussion Papers
2728, C.E.P.R. Discussion Papers.
- Luigi Guiso & Monica Paiella, 2003. "Risk Aversion, Wealth and Background Risk," Temi di discussione (Economic working papers) 483, Bank of Italy, Economic Research and International Relations Area.
- Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute.
- Monica Paiella & Luigi Guiso, 2004. "Risk Aversion, Wealth and Background Risk," 2004 Meeting Papers 525, Society for Economic Dynamics.
- Luigi Guiso & Tullio Jappelli, 2009.
"Financial Literacy and Portfolio Diversification,"
CSEF Working Papers
212, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," Economics Working Papers ECO2008/31, European University Institute.
- Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," EIEF Working Papers Series 0812, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.
- G. Constantinides, 1990.
"Habit formation: a resolution of the equity premium puzzle,"
Levine's Working Paper Archive
1397, David K. Levine.
- Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
- Knutson, Brian & Wimmer, G. Elliott & Kuhnen, Camelia & Winkielman, Piotr, 2008. "Nucleus accumbens activation mediates the influence of reward cues on financial risk-taking," MPRA Paper 8013, University Library of Munich, Germany.
- Ulrike Malmendier & Stefan Nagel, 2011.
"Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 126(1), pages 373-416.
- Ulrike Malmendier & Stefan Nagel, 2009. "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?," NBER Working Papers 14813, National Bureau of Economic Research, Inc.
- Rachel Croson & Uri Gneezy, 2009. "Gender Differences in Preferences," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 448-74, June.
- Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
- Mark J. Kamstra & Lisa A. Kramer & Maurice D. Levi, 2003.
"Winter Blues: A SAD Stock Market Cycle,"
American Economic Review,
American Economic Association, vol. 93(1), pages 324-343, March.
- Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
- Yosef Bonaparte & Russell Cooper, 2010. "Costly Portfolio Adjustment," Economics Working Papers ECO2010/19, European University Institute.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
When requesting a correction, please mention this item's handle: RePEc:eie:wpaper:1322. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Facundo Piguillem)
If references are entirely missing, you can add them using this form.