Abstract
Shocks and traumatic experiences can alter individual behavior and deplete the ability to make economic decisions. Using data from individuals residing in two war-torn regions in Colombia, I analyze how direct exposure to violence induces changes in risk attitudes, and find that more severe and recent episodes of violence bring about higher levels of risk aversion in the gains and ambiguity domains. Consistent with evidence from psychology studies, the effect is driven by the incidence of anxiety disorders. Violence can thus thwart the economic recovery of victims and have transcending impacts on poverty dynamics through a behavioral channel.
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