Discussion paper

DP9589 Time Varying Risk Aversion

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.


Guiso, L, L Zingales and P Sapienza (eds) (2013), “DP9589 Time Varying Risk Aversion”, CEPR Press Discussion Paper No. 9589. https://cepr.org/publications/dp9589