The relation of risk attitudes and other-regarding preferences: A within-subjects analysis

In this paper we provide experimental evidence on the relation of individual risk attitudes and subjects׳ aversion to favorable inequality. In a within-subjects design we expand Blanco et al.׳s (2011) modified dictator game by the risk-elicitation task of Eckel and Grossman (2002). Our data show strong support for a significant negative correlation between risk tolerance and an aversion to favorable inequality. The results are independent of gender, i.e., women and men show a similar correlation in these traits.     

Social responsibility promotes conservative risk behavior

Previous studies show that group risk taking can be more conservative than individual risk taking. Two common, but untested reasons for this greater caution are the influence of social responsibility and a tendency to conform to the preferences of others. We study changes in risk taking in simple settings, where another’s risk taking can sometimes be observed, and where decisions affect not only one’s own payoffs but sometimes also affect those of a passive, second party. We find that social responsibility leads to more conservative risk behavior in group decision making. Conformism has a more symmetric effect: observing the choice of another tends to lead both individual and social decisions toward whatever the other’s expressed risk preference is. Direct tests fail to link the social behavior we observe to the social preference for distributional fairness common in decision-making under certainty.     

Keep up with the winners: Experimental evidence on risk taking,asset integration,and peer effects

The paper reports the result of an experimental game on asset integration and risk taking. We find some evidence that winnings in earlier rounds affect risk taking in subsequent rounds, but no evidence that real life wealth outside the experiment affects risk taking. Controlling for past winnings, participants receiving a low endowment in a round engage in more risk taking. We test a ‘keeping-up-with-the-Joneses’ hypothesis and find that subjects seek to keep up with winners, though not necessarily with average earnings. Overall, the evidence suggests that risk taking tracks a reference point affected by social comparisons.     

Stochastic dominance and behavior towards risk: The market for Internet stocks

Internet stocks registered large gains in the late 1990s, followed by large losses from early 2000. Using stochastic dominance theory, we infer how investor risk preferences have changed over this cycle, and relate our findings to utility theory and behavioral finance. Our major findings are as follows. First, risk averters and risk seekers show a distinct difference in preference for Internet versus “old economy” stocks. This difference is most evident during the bull market period (1998–2000) where Internet stocks stochastically dominate old economy stocks for risk seekers but not risk averters. In the bear market, risk averters show an increased preference for old economy stocks, while risk seekers show a reduced preference for Internet stocks. These results are inconsistent with prospect theory and indicate that investors exhibit reverse S-shaped utility functions.     

The relationship between risk attitudes and heuristics in search tasks: A laboratory experiment

Experimental studies of search behavior suggest that individuals stop searching earlier than the optimal, risk-neutral stopping rule predicts. Two different classes of decision rules could generate this behavior: rules that are optimal conditional on utility functions departing from risk neutrality, or heuristics derived from limited cognitive processing capacities and satisficing. To discriminate between these possibilities, we conducted an experiment that consists of a search task as well as a lottery task designed to elicit utility functions. We find that search heuristics are not related to measures of risk aversion, but to measures of loss aversion.     

The separability principle in bargaining

Summary. We investigate the implications of the separability principle in the context of bargaining. For two bargaining problems with the same population, suppose that there is a subgroup of agents who receive the same payoffs in both bargaining problems. Moreover, if we imagine the departure of this subgroup with their payoffs, then the remaining agents face the same opportunities in both bargaining problems. The separability principle requires that under these hypotheses, the remaining agents should receive the same payoffs in both bargaining problems. We begin with investigating the logical relations between separability and two other axioms, contraction independence and consistency. Then, we establish characterizations of the Nash and egalitarian solutions on the basis of separability. Received: 12 August 2002, Revised: 22 March 2004, JEL Classification Numbers: C71, C78.Youngsub Chun: This work was supported by the Brain Korea 21 Project in 2003. I am grateful to William Thomson, a referee, and an associate editor for their valuable comments.     

The effects of risk preferences in mixed-strategy equilibria of games

We consider the effects of risk preferences in mixed-strategy equilibria of 2×2 games, provided such equilibria exist. We identify sufficient conditions under which the expected payoff in the mixed equilibrium increases or decreases with the degree of risk aversion. We find that (at least moderate degrees of) risk aversion will frequently be beneficial in mixed equilibria.     

A group selection perspective on economic behavior, institutions and organizations

This article examines the role of group dynamics and interactions in explaining economic behavior and the evolution of institutions. Our starting point is the large literature on group selection in the biological, behavioral and social sciences. We present a range of interpretations of group selection, describe a complete set of group selection mechanisms, and discuss the empirical and experimental evidence for group selection. Unique features of cultural group selection are investigated, and opportunities for applying the latter to various areas of economic theory and economic policy are identified.     

Currency returns and downside risk: Debt,volatility, and the gap from benchmark values

The paper considers competing portfolio-balance specifications of currency returns, including one based on expected utility theory and another on prospect theory. The prospect theory specification relates downside risk to the gap between the exchange rate and its benchmark value. The empirical analysis uses survey data on exchange rate expectations to test directly the models’ predictions concerning ex ante excess returns. It also relies on the cointegrated VAR framework, which is well suited for testing competing models and dealing with unit roots. Like earlier studies, we find little support for the expected utility theory model in three major currency markets. By contrast, the prospect theory model’s predictions are largely borne out in the data, including those about sign reversals. We find the strongest support for a hybrid model that incorporates the risk factors of both models.     

Heterogeneous preferences and investments in energy saving measures

We investigate whether risk, time, environmental, and social preferences affect single-family homeowners’ investments in the energy efficiency of their house using established experimental measures and questionnaires. We find that homeowners who report to be more risk taking are more likely to have renovated their house. Pro-environmental and future-oriented renovators, i.e. renovators with lower discount factors, live in homes with higher energy efficiency. Pro-social preferences as measured in a dictator game relates positively to the energy quality of renovated houses. Controlling for the energy efficiency of houses, we further find that energy consumption as measured by heating and electricity costs is lower for future-oriented and pro-environmental individuals.     

Real estate and relative risk aversion with generalized recursive preferences

This paper investigates how real estate wealth affects the household’s attitude toward risk, and derives the closed-form expressions for risk aversion with generalized recursive preferences. We find three channels through which real estate wealth affects risk aversion, and these channels are absent in the traditional measure of relative risk aversion as in Arrow (1965) and Pratt (1964). First, illiquidity and fluctuations in real estate value increase consumption risk, thereby increasing risk aversion. Second, real estate as an asset provides a cushion for absorbing negative shocks to households, reducing risk aversion. Third, an increase in real estate prices lowers the profit of the firm that uses real estate as a factor of production, induces a decline in the real wage, and causes a rise in consumption risk. This channel increases risk aversion. We study how these channels as a whole determine relative risk aversion using a basic real business cycle model with generalized recursive preferences and compare the results with the case of expected utility preferences. Finally, we explore the implications of the firm’s and the household’s real estate holdings and illiquidity of real estate on the risk premiums for equity and real estate.     

Heterogeneous treatment effects and mechanisms in information-based environmental policies: Evidence from a large-scale field experiment

Policymakers often rely on non-pecuniary, information-based programs to achieve social objectives. Using data from a water conservation information campaign implemented as a randomized controlled trial, we estimate heterogeneous household responses. Understanding such heterogeneity is important for improving the cost-effectiveness of non-pecuniary programs, extending them to other populations and probing the mechanisms through which the treatment effects arise. We find little evidence of heterogeneous responses to purely technical information or to traditional conservation messages that combine technical information and moral suasion. In contrast, norm-based messages that combine technical information, moral suasion and social comparisons exhibit strong heterogeneity: households that are wealthier, owner-occupied and use more water are more responsive. These subgroups tend to be least responsive to pecuniary incentives. We find no evidence that any subgroup increases their water use in response to the messages. By targeting the messages to subgroups known to be most responsive, program costs could be reduced by over 50% with only a 20% reduction in the treatment effect. Combining theory and data, we also shed light on the mechanisms through which the treatment effects arise, which has implications for program design and future research on the program's welfare effects.     

Parametric characterizations of risk aversion and prudence

Summary. Our first main result says that whether one decision maker is more risk averse than another can be determined from their attitudes toward a given two-parameter family of risks. When all risks belong to this family, risk aversion can be compared even when initial wealth is random. Our second main result solves a long-standing problem in mean-variance analysis: what is the interpretation of the concavity of utility as a function of mean and variance? We show that in the case of normal distributions, this utility function is concave if and only if the agent has decreasing prudence. Received: July 29, 1996; revised: October 2, 1998     

More on parametric characterizations of risk aversion and prudence

Summary. This note provides an alternative proof for the equivalence of decreasing absolute prudence (DAP) in the expected utility framework and in a two-parametric approach where utility is a function of the mean and the standard deviation. In addition, we elucidate that the equivalence of DAP and the concavity of utility as a function of mean and variance, which was shown to hold for normally distributed stochastics in Lajeri and Nielsen [4], cannot be generalized. Received: November 27, 2000; revised version: November 26, 2001 Correspondence to: T. Eichner     

Intertemporal substitution, risk aversion and ambiguity aversion

Summary. This paper axiomatizes a form of recursive utility on consumption processes that permits a role for ambiguity as well as risk. The model has two prominent special cases: (i) the recursive model of risk preference due to Kreps and Porteus [18]; and (ii) an intertemporal version of multiple-priors utility due to Epstein and Schneider [8]. The generalization presented here permits a three-way separation of intertemporal substitution, risk aversion and ambiguity aversion.Received: 5 August 2003, Revised: 12 March 2004, JEL Classification Numbers: D80, D81, D90.I am grateful to Larry Epstein for his guidance and invaluable advice, and to a referee for helpful comments and suggestions.     

Comparing risk aversion in a probability triangle

An agent's acceptance set consists of the probability distributions preferred to the status quo. One agent is more risk averse than another if the more risk averse agent's acceptance set is a proper subset of the less risk averse agent's acceptance set. An agent's odds premium expresses the odds in favor of winning the largest cash prize in a lottery over the best and worst alternatives that is indifferent to the the agent's initial wealth. Comparisons of two agents odds premia completely characterizes the risk aversion relations between them when facing lotteries in a probability triangle. The result applies to expected utility and some non-expected utility theories. Received: December 30, 1998; revised version: February 10, 1999     

Segmented risk sharing in a continuous-time setting

Summary. The economy we study is comprised of a continuum of individuals. Each has a stochastic endowment that evolves continuously and independently of all other individuals' endowment processes. Individuals are risk averse and would therefore like to insure their endowment processes. The mutual independence of their endowment processes makes it feasible for them to obtain this insurance by pooling their endowments. We investigate whether such a scheme would survive as an equilibrium in a noncooperative setting. Received: October 16, 2000; revised version: August 8, 2001     

Incomplete risk sharing arrangements and the value of information

Summary. The paper constructs a theoretical framework in which the value of information in general equilibrium is determined by the interaction of two opposing mechanisms: first, more information about future random events leads to better individual decisions and, therefore, higher welfare. This is the ‘Blackwell effect’ where information has positive value. Second, more information in advance of trading limits the risk sharing opportunities in the economy and, therefore, reduces welfare. This is the ‘Hirshleifer effect’ where information has negative value. We demonstrate that in an economy with production information has positive value if the information refers to non-tradable risks; hence, such information does not destroy the Blackwell theorem. Information which refers to tradable risks may invalidate the Blackwell theorem if the consumers are highly risk averse. The critical level of relative risk aversion beyond which the value of information becomes negative is less than 0.5. Received: May 14, 2001; revised version: March 5, 2002     

Belief in Mean Reversion and the Disposition Effect: An Experimental Test

The disposition effect refers to investors' tendency to disproportionately sell more winning than losing assets. The literature mostly offered indirect evidence regarding its cause. Using a lab experiment, the author directly evaluates the two competing behavioral mechanisms for this effect: belief in mean reversion and dual risk attitudes of prospect theory. The participants were endowed with some hypothetical assets, observed price charts, and made selling decisions. Sixty-one percent of them exhibited significant disposition effect. The author elicited the participants' risk attitude parameters and beliefs about price movements, and found that beliefs, especially those in the loss domain, but not the dual risk attitudes, significantly contributed to the between-subject variation of the disposition effect. The results from a goodness-of-fit test also favor the belief mechanism.     

Designing knowledge chain networks in China — A proposal for a risk management system using linguistic decision making

Designing Knowledge Supply Networks (KSN) with universities and research institutes has become a key source of technological innovations in Mainland China. In order to explore the key design principles, we first present typologies within KSN and explain the factors that can push, guide, or support the innovation process in such a network. Second, we identify and classify the particular risks that prevail when KSN are designed in an emerging region. To assess these risks, we next propose an advanced method that takes into consideration typical problems in group decision-making processes by applying linguistic operators derived from the field of decision theory and fuzzy-sets theory. The risk evaluation method is illustrated with a case study. Fourth, we offer advice on the mitigation of risks in KSN. Finally, we provide insights into the implementation of the risk evaluation method and its automation using Stakeholder Information Systems.