Does knowledge of finance mitigate the gender difference in financial risk-aversion?

We investigate the gender difference in financial risk aversion using a survey of finance professors from universities across the United States. We compare their actual portfolio allocations to that of respondents in the Federal Reserve's Survey of Consumer Finances (SCF). We find that among highly educated individuals, women are significantly more risk averse than men. However, we find that when men and women have both attained a high level of financial education, they are equally likely to invest a significant portion of their portfolio in risky assets, suggesting that financial education mitigates the gender difference in financial risk aversion.     

General and specific cancer risk perceptions: how are they related?

Understanding how people construe and act upon cancer risk is important for efforts to target risk-increasing health behaviors. Importantly, research participants are often asked to estimate their risk for cancer (in general), which could mask the fact that cancer represents a range of diseases, and that different cancer types can have distinct risk factors. It is unclear whether individuals perceive general cancer risk as being comprised of an aggregation of risk for specific cancer sites, or whether general cancer risk perceptions reflect the specific type of cancer most salient to them. In this study, general cancer risk perceptions were regressed on specific risk perceptions for colon, lung, prostate (men only), and breast (women only), using data from a nationally representative sample. We found that among men and women, all forms of cancer predicted independent variance in estimates of general cancer risk. There were also stronger relationships between general risk perceptions and each specific risk perception than between any two specific risk perceptions, suggesting that individuals differentiate between specific cancers and general cancer risk. These findings offer some confidence that people’s estimates of general cancer risk take multiple cancer types into account.     

Determinants of individual investment decisions in investment‐based crowdfunding

We investigate determinants of investment decisions in investment‐based (equity and bond) crowdfunding campaigns, using a novel investment‐, investor‐ and campaign‐level database, where equity refers to investments in entrepreneurial start‐ups and bonds to large real estate projects. We find that investors who have higher social interactions invest more. Social interactions are important in an equity crowdfunding context but do not affect participation in bond investments. This is consistent with the view that investors' social networks help reduce information asymmetry. Women invest less in the riskiest (equity) investments but more in safer ones (bonds). These findings are better explained by differences in risk aversion than differences in overconfidence between men and women. Overall, the findings contribute to the understanding of how investment‐based crowdfunding can be a viable source of entrepreneurial finance and how entrepreneurs' campaign decisions affect investor participation in this new form of entrepreneurial finance.     

Stock market expectations and risk aversion of individual investors

We study the relationship between stock market return expectations and risk aversion of individuals and test whether the joint effects arising from the interaction of these two variables affect investment decisions. Using data from the Dutch National Bank Household Survey, we find that higher risk aversion is associated with lower stock market expectations. We identify significant and negative effects on the probability that individuals invest in stocks arising from the interaction between stock market expectations and risk aversion. These effects are in addition to a significant and positive impact from stock market return expectations as well as a significant and negative effect from risk aversion separately. However, once individuals participate in the stock market, their stock market expectations alone remain significant in determining their portfolio allocation decisions.     

An Insurance Market Simulation With Both Adverse and Advantageous Selection

The theory of adverse selection predicts that high‐risk individuals are more likely to buy insurance than low‐risk individuals if asymmetric information regarding individuals’ risk type is present in the market. The theory of advantageous selection predicts the opposite—a negative relationship between insurance coverage and risk type can be obtained when hidden knowledge in other dimensions (e.g., the degree of risk aversion) is present in addition to the risk type. Using the heterogeneity of insurance buyers in either risk type or risk aversion, we first introduce a classroom‐based insurance market simulation game to show that adverse selection and advantageous selection can coexist. We then explain the underlying concepts using two methods: a mathematical framework based on expected utility theory and an empirical framework based on the results of the game itself. The game is easy to implement, reinforces textbook concepts by providing students a hands‐on experience, and supplements current textbooks by bringing their content up to date with current research.     

Markets versus governments

We provide a simple framework for comparing market allocations with government-regulated allocations. Governments can collect information about individuals’ types and enforce transfers across individuals. Markets (without significant government intervention) have to rely on transactions that are ex post beneficial for individuals. Consequently, governments achieve better risk sharing and consumption smoothing than markets. However, politicians in charge of collective decisions can use the centralized information and the enforcement power of government for their own benefits. This leads to political economy distortions and rents for politicians, making government-operated allocation mechanisms potentially worse than markets. We provide conditions under which it is ex ante beneficial for the society to tolerate the political economy distortions in exchange for the improvement in risk sharing. For example, more effective controls on politicians or higher discount factors of politicians make governments more attractive relative to markets. Moreover, when markets cannot engage in self-enforcing risk-sharing arrangements and income effects are limited, greater risk aversion and greater uncertainty make governments more attractive relative to markets. Nevertheless, we also show theoretically and numerically that the effect of risk aversion on the desirability of markets may be non-monotonic. In particular, when markets can support self-enforcing risk-sharing arrangements, a high degree of risk aversion improves the extent of risk sharing in markets and makes governments less necessary. The same pattern may also arise because of “income effects” on labor supply. Consequently, the welfare gains of governments relative to markets may have an inverse U-shape as a function of the degree of risk aversion of individuals.     

风险态度、合作行为与联保贷款契约:一个实验研究

本文应用实验室实验方法,研究了在不同贷款契约情况下,借款人风险态度等因素对合作水平(努力程度)的影响。研究发现:(1)联保贷款契约下参与者的努力水平之间存在正相关关系,且其努力水平显著高于个人责任契约下参与者的努力水平。说明联保贷款契约参与者存在较高的有条件合作行为;(2)在联保贷款契约下,风险喜好参与者的努力水平显著高于风险规避参与者。说明联保贷款契约对风险喜好参与者具有显著激励作用;(3)风险规避参与者的努力水平随实验期数增加而下降的速度比风险喜好参与者更快,风险规避参与者对联保贷款契约合作水平有较大危害。我们提出:小额贷款机构应当为风险喜好借款人提供联保贷款契约,并且避免风险规避的借款人与风险喜好的借款人组成联保贷款小组。对风险喜好借款人组成的联保贷款小组,联保贷款契约的期限可以较长。     

Financial advice and gender: Wealthy individual investors in the UK

We examine how gender differences in investment risk tolerance, knowledge, confidence and portfolio cash allocations relate to the gender mix of investors and financial advisors among a sample of wealthy individuals in the UK. Our results demonstrate that gender effects are more nuanced than previously assumed. First, while even wealthy women consider themselves more conservative and allocate a higher proportion of their investable assets to cash than men, previous findings of lower investment knowledge and confidence do not extend to our sample. Second, having an advisor matters. Advised investors perceive themselves to have a higher risk tolerance and invest 10.6%-points more than self-directed investors. Finally, the investor-advisor gender combination matters, but only for female investors. Women with male advisors are more risk averse, feel less knowledgeable and less confident about their investment decisions. They also invest 11%-points less than women with female advisors. Indeed, female investors advised by women report the highest risk tolerance and make the lowest portfolio allocation to risk-free assets across the full sample, including men.     

Risk aversion under preference uncertainty

We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for optimal asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty.     

Public Versus Private Insurance with Dual Theory: A Political Economy Argument

This paper analyzes the political support for public insurance in the presence of a private insurance alternative. The public insurance is compulsory and offers a uniform insurance policy. The private insurance is voluntary and can offer different insurance policies. Adopting Yaari's [Econometrica, 55, 95–115, 1987] dual theory to expected utility (i.e., risk aversion without diminishing marginal utility of income), we show that adverse selection on the private insurance market may lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below the average risk (so that the median actually subsidizes high-risk individuals). We also show that risk aversion makes public insurance more attractive and that the dual theory is less favourable to a mixed insurance system than the expected utility framework. Lastly, we demonstrate how the use of genetic tests may threaten the political viability of public insurance.     

Social Security investment accounts: lessons from participant-directed 401(k) data

Newly available 401(k) participant investment data may have implications for individual Social Security account (IA) proposals. We found that women with wages between $25,000 and $50,000 have a significantly greater probability of investing a small percentage of their 401(k) in equities than their male counterparts, but those with salaries over $75,000 have a smaller probability. Hence, women’s less aggressive investment behavior may be primarily due to younger cohorts and may not apply above a threshold wage. However, overall, 28.4% of men and 33.8% of women are conservative investors, suggesting the possible risk low IA accumulations under some proposals.     

Emotions,attitudes, and appraisal in the management of climate-related risks by fish farmers in Northern Thailand

Many previous studies have documented that farmers are risk-averse, while other studies have shown that farmers analyze and estimate risks. Conventional risk aversion measures and analytical judgment often do not fully explain decision behavior. Thus, it may be necessary to consider emotions. The objective of this study was to enhance understanding of the interactions between attitudes, analysis, and emotions in making risk decisions. The study used a mixture of methods, including: a tablet game, risk aversion scales, in-depth interviews, and focus group discussions with fish cage farmers in Northern Thailand. There was no significant difference in risk aversion with respect to gender, age group, or region. Having sufficient capital made it possible to take more risks. Recently being impacted by floods or droughts, or being very concerned with climate change, was not associated with taking fewer risks. Measures of risk aversion did not predict risk decisions. Feeling worried, concerned, anxious, or stressed were the most common negative emotions referred to in interviews. Fear was a reason for not taking risks. Common positive emotions were joy, excitement, and feeling relaxed or relieved. Men who expressed feeling excited or thrilled chose riskier, higher stocking densities in games than women. A common belief was that men were quicker and more confident when making decisions. Another was that emotions had little impact on decisions, but were a response to success and failure – a claim inconsistent with other findings that imply emotions are also important prior to stocking decisions, and while waiting for the harvest. Fear and anxiety in the period prior to harvest may help motivate risk management practices, such as close monitoring and aeration. In conclusion, emotions may play a more important role in making decisions about climate-related risks than was previously recognized.     

Risk-aversion concepts in expected- and non-expected-utility models

The non-expected-utility theories of decision under risk have favored the appearance of new notions of increasing risk like monotone increasing risk (based on the notion of comonotonic random variables) or new notions of risk aversion like aversion to monotone increasing risk, in better agreement with these new theories. After a survey of all the possible notions of increasing risk and of risk aversion and their intrinsic definitions, we show that contrary to expected-utility theory where all the notions of risk aversion have the same characterization (u concave), in the framework of rank-dependent expected utility (one of the most well known of the non-expectedutility models), the characterizations of all these notions of risk aversion are different. Moreover, we show that, even in the expected-utility framework, the new notion of monotone increasing risk can give better answers to some problems of comparative statics such as in portfolio choice or in partial insurance. This new notion also can suggest more intuitive approaches to inequalities measurement.     

Portfolio choice with skewness preference and wealth-dependent risk aversion

This paper studies a dynamic portfolio choice problem for an investor with both wealth-dependent risk aversion and wealth-dependent skewness preferences. In a general economic setting, the solution is characterized in terms of a system of extended Hamilton-Jacobi-Bellman (EHJB) equations and the solution is given in closed form in some special cases. We demonstrate the effects of higher order risk preferences and state-dependent risk aversion on the optimal asset allocation decisions. We find that wealth-dependent risk aversion facilitates risk taking and the skewness preference leads to a more positively skewed portfolio in certain circumstances.     

Is higher variance necessarily bad for investment?

We consider decision-making under risk in which random events affect the value of the portfolio multiplicatively, rather than additively. In this case, a higher variability in the rate of return not only is associated with a higher risk, a bad property, but also engenders a higher expected return, a good property. As a result, certain expected utility maximizing investors, namely those with the lowest risk aversion, will prefer some portfolios with higher variances in the rate of return over others with lower ones. This is demonstrated, and implications are considered.     

Precautionary Saving and Consumption Smoothing across Time and Possibilities

This paper examines how aversion to risk and aversion to intertemporal substitution determine the strength of the precautionary saving motive in a two-period model with Selden/Kreps–Porteus preferences. For small risks, we derive a measure of the strength of the precautionary saving motive that generalizes the concept of "prudence" introduced by Kimball (1990b) . For large risks, we show that decreasing absolute risk aversion guarantees that the precautionary saving motive is stronger than risk aversion, regardless of the elasticity of intertemporal substitution. Holding risk preferences fixed, the extent to which the precautionary saving motive is stronger than risk aversion increases with the elasticity of intertemporal substitution. We derive sufficient conditions for a change in risk preferences alone to increase the strength of the precautionary saving motive and for the strength of the precautionary saving motive to decline with wealth. Within the class of constant elasticity of intertemporal substitution, constant-relative risk aversion utility functions, these conditions are also necessary.     

Optimal Carried Interest: Adverse Selection in Islamic and Conventional Venture Capital and Private-Equity Funds

In an optimal carried interest model with adverse selection, the optimal profit-loss sharing ratio (PSR) explains how the risk aversion of the two parties can affect their bargaining powers by allowing investors to detect the true risk aversion of fund managers and not their true skills. The higher the management fee, the higher is the PSR. Our simulation exercise shows that when the fund manager is more risk averse than the investor for a higher invested capital and weaker expected net profit, the optimal negotiated profit-sharing ratio will be higher.     

Precautionary Insurance Demand With State-Dependent Background Risk

This article considers a zero‐mean background risk that is uncorrelated with insurable losses, but is not necessarily statistically independent. In particular, the size of the background risk can vary in different insurable‐loss states. We show how a prudent individual will buy either more insurance or less insurance than with no background risk, depending on the relative size of the background risk in the loss states vis‐á‐vis the no‐loss states. If we consider two individuals, with one more risk averse than the other, we need to compare the intensities of their precautionary motives, in addition to their measures of risk aversion, before we can determine who buys more insurance coverage in the presence of the state dependent background risk.     

Gender matters most. The impact on short‐term risk aversion following a financial crash

This paper examines how investors in an emerging market react to a domestic financial crisis. We conjecture that risk aversion increases following such events and that the effect is more pronounced among specific groups of investors. Our study makes use of a unique dataset of mutual fund investors from one of Colombia's largest stock brokers. Our results reveal that women and self‐employed individuals make the largest withdrawals from risky funds after financial crises.     

Risk premia: Exact solutions vs. log-linear approximations

We derive exact expressions for the risk premia for general distributions in a Lucas economy and show that the errors when using log-linear approximations can be economically significant when the shocks are nonnormal. Assuming growth rates are Normal Inverse Gaussian (NIG) and fitting the distribution to the data used in Mehra and Prescott (1985), the coefficient of relative risk aversion required to match the equity premium is more than halved compared to the finding in their article. We also consider a standard long-run risk model and, by comparing our exact solutions to the log-linear approximations, we show that the approximation errors are substantial, especially for high levels of risk aversion.