DP9589 Time Varying Risk Aversion
Author(s): | Luigi Guiso, Paola Sapienza, Luigi Zingales |
Publication Date: | August 2013 |
Keyword(s): | Fear, Financial Crisis, Risk Aversion |
JEL(s): | D1, D8, G11, G12 |
Programme Areas: | Financial Economics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=9589 |
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.