DP8334 The role of intuition and reasoning in driving aversion to risk and ambiguity
|Author(s):||Jeff Butler, Luigi Guiso, Tullio Jappelli|
|Publication Date:||April 2011|
|Keyword(s):||decision theory, dual systems, intuitive thinking, Risk ambiguity, Risk aversion|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8334|
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.