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Finance and the Good Society by Robert J. Shiller

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Chapter 21

An Impulse for Risk Taking

Economic theory presents people as substantially risk averse, rationally avoiding uncertainty. And yet there is a side to people that impels them to do just the opposite—to put themselves in risky situations. This natural impulse, which is connected with our sense of adventure as well as our self-esteem, is part of what drives entrepreneurship, what drives animal spirits in the real world. It is also part of what causes speculative bubbles and ultimately crashes.1

This side of human nature has not been adequately recognized in much of financial research—even in much of the work of behavioral finance researchers, who often measure risk preferences by asking people to choose between hypothetical risky prospects ...

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