Discussion Paper Details

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Title: Time Varying Risk Aversion

Author(s): Luigi Guiso, Paola Sapienza and Luigi Zingales

Publication Date: August 2013

Keyword(s): Fear, Financial Crisis and Risk Aversion

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Guiso, L, Sapienza, P and Zingales, L. 2013. 'Time Varying Risk Aversion'. London, Centre for Economic Policy Research.