Time varying risk aversion
By Luigi Guiso, Paola Sapienza, Luigi Zingales. Journal of Financial Economics, 2013
711 citations recorded by the source corpus.
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.
Subfields: Finance, General Decision Sciences, Management Science and Operations Research
View Paper: https://www.semanticscholar.org/paper/98b0d91dac68b5a9a4bd0da41ef92ed8670984c4
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Citations in the corpus
- Do Risk Preferences Change? Evidence from the Great East Japan Earthquake (2018, neutral): “4 Notable exceptions that use panel data include Brunnermeier and Nagel (2008), Sahm (2012), and Guiso, Sapienza, and Zingales (2013), who examine shocks in financial domain.”
- Catering to Investors Through Security Design: Headline Rate and Complexity (2017, background): “In the risksharing framework, under the assumption that retail investors are more risk averse than financial institutions, we should observe the opposite, as risk aversion has increased following the global financial crisis (Guiso, Sapienza, and Zingales, 2014).”
- Political Cycles and Stock Returns (2020, neutral): “For example, Guiso et al. (2016) use survey data to show that risk aversion surged after the 2008 financial crisis, even among investors who did not experience losses.”
- Housing markets in a pandemic: Evidence from historical outbreaks (2020, background): “…theoretical and empirical work shows that when risks are salient, and when events trigger negative emotions, risk aversion can temporarily increase significantly (e.g. Bordalo et al., 2012; Cohn et al., 2015; Guiso et al., 2018; Loewenstein, 2000 ), and affect risk perception ( Slovic et al., 2007 ).”