Working Paper: CEPR ID: DP8334
Authors: Jeff Butler; Luigi Guiso; Tullio Jappelli
Abstract: Using a large sample of retail investors as well as experimental data we find that risk and ambiguity aversion are positively correlated. We show the common link is decision style: intuitive thinkers tolerate more risk and ambiguity than effortful reasoners. One interpretation is that intuitive thinking confers an advantage in risky or ambiguous situations. We present supporting lab and field evidence that intuitive thinkers outperform others in uncertain environments. Finally, we find that risk and ambiguity aversion vary with individual characteristics and wealth. The wealthy are less risk averse but more ambiguity averse, which has implications for financial puzzles.
Keywords: decision theory; dual systems; intuitive thinking; risk; ambiguity; risk aversion
JEL Codes: D81; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Intuitive thinking (D87) | lower risk aversion (D81) |
| Reasoning (D01) | higher risk aversion (D81) |
| Intuitive thinking (D87) | lower ambiguity aversion (D81) |
| Wealth (D31) | lower risk aversion (D81) |
| Wealth (D31) | higher ambiguity aversion (D81) |