Citation

Discussion Paper Details

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

Author(s): Jeff Butler, Luigi Guiso and Tullio Jappelli

Publication Date: April 2011

Keyword(s): decision theory, dual systems, intuitive thinking, Risk ambiguity and Risk aversion

Programme Area(s): Financial Economics

Abstract: 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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8334

Bibliographic Reference

Butler, J, Guiso, L and Jappelli, T. 2011. 'The role of intuition and reasoning in driving aversion to risk and ambiguity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8334