Long Run Impact of Traumatic Experience on Attitudes toward Risk: Study of Korean War and Its Impact on Risk Aversion

Abstract

A number of previous studies show that short run impact of traumatic experience on risk attitudes. The direction of impact is mixed, as short run emotional effect dominates measured alterations in risk attitudes. This paper studies the long run impact of traumatic event on risk attitude formation, after the short run emotional effect dissipates by investigating if early childhood exposure to a war affects risk attitudes, using a survey data from South Korea. We use hypothetical lottery questions in the survey, conducted on approximately 8,000 individuals in South Korea. South Korea went through a devastating civil war from 1950 to 1953 that eventually left two Koreas divided until today. Unlike short-run impact studies, we find that a long run impact, mainly from the change in the shape of respondents ’ innate utility function is limited to a specific age group. We find that CRRA risk aversion parameter is significantly affected by the war for respondents who had early childhood exposure to the war. A corroborative analysis of South Korean presidential election survey from 2007 also shows that political conservativeness of the same age group of respondents is significantly affected by the war.

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