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Evidence for Countercyclical Risk Aversion: An Experiment with Financial Professionals
Alain Cohn, Jan Engelmann, Ernst Fehr, and Michel André Maréchal
American Economic Review. Feb 2015, Vol. 105, No. 2: Pages 860-885

Evidence for Countercyclical Risk Aversion: An Experiment with Financial Professionals†

Alain Cohn1, Jan Engelmann2, Ernst Fehr3 and Michel André Maréchal4

1Department of Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich (e-mail: )

2Department of Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich (e-mail: )

3Department of Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich (e-mail: )

4Department of Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich (e-mail: ).

Abstract

Countercyclical risk aversion can explain major puzzles such as the high volatility of asset prices. Evidence for its existence is, however, scarce because of the host of factors that simultaneously change during financial cycles. We circumvent these problems by priming financial professionals with either a boom or a bust scenario. Subjects primed with a financial bust were substantially more fearful and risk averse than those primed with a boom, suggesting that fear may play an important role in countercyclical risk aversion. The mechanism described here is relevant for theory and may explain self-reinforcing processes that amplify market dynamics. (JEL E32, E44, G01, G11, G12)