Time Varying Risk Aversion
We use portfolio data and repeated surveys 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 increase substantially after the crisis. We also find that individuals whose risk aversion increases sell more stock. We try to identify the cause of this increase by looking at four possible channels suggested by theory: changes in wealth, changes in expected income, changes in perceived probabilities, and emotion-based changes of the utility function. Our data are inconsistent with the first two channels, while they suggest that fear is a potential mechanism that influences financial decisions, whether it does by increasing the curvature of the utility function or the salience of negative outcomes.
Guiso, Luigi, Paola Sapienza and Luigi Zingales. Forthcoming. Time Varying Risk Aversion. Journal of Financial Economics.