53 Pages Posted: 2 Aug 2013 Last revised: 30 Aug 2014
Date Written: June 1, 2013
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.
Suggested Citation: Suggested Citation
Guiso, Luigi and Sapienza, Paola and Zingales, Luigi, Time Varying Risk Aversion (June 1, 2013). Chicago Booth Research Paper No. 13-64; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2303800 or http://dx.doi.org/10.2139/ssrn.2303800