Working Paper: CEPR ID: DP9589
Authors: Luigi Guiso; Paola Sapienza; Luigi Zingales
Abstract: 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.
Keywords: fear; financial crisis; risk aversion
JEL Codes: D1; D8; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 2008 financial crisis (F65) | Increased individual risk aversion (D11) |
| Fear (Y60) | Increased individual risk aversion (D11) |
| Increased individual risk aversion (D11) | Decreased certainty equivalent (D81) |
| Fear induced by the financial crisis (G01) | Increased individual risk aversion (D11) |
| Fear induced by horror movie (G41) | Decreased certainty equivalent (D81) |