NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Time Varying Risk Aversion

Luigi Guiso, Paola Sapienza, Luigi Zingales

NBER Working Paper No. 19284
Issued in August 2013
NBER Program(s):Asset Pricing

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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Document Object Identifier (DOI): 10.3386/w19284

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