Working Paper: NBER ID: w19284
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: risk aversion; financial crisis; emotional response; fear; asset pricing
JEL Codes: D81; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fear (Y60) | risk aversion (D81) |
| fear (Y60) | certainty equivalent (D50) |
| risk aversion (D81) | trading behavior (G41) |
| 2008 financial crisis (F65) | risk aversion (D81) |
| 2008 financial crisis (F65) | certainty equivalent (D50) |