Time Varying Risk Aversion∗

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. This increase is present even among investors who did not suffer any financial loss and are unlikely to have suffered a reduction in their lifetime income. To test whether this increase might be an emotional response triggered by a scary experience, we conduct a lab experiment. Consistent with a fear-based explanation, we find that subjects who watched a horror movie exhibit a higher risk aversion than subjects who did not. The size of the increase in risk aversion caused by the horror movie is similar to the one experienced by our bank’s clients during the crisis