Home About us Contact
|
Home About us Contact | ||
|
|
||
Risk Preferences (risk + preference)
Selected AbstractsCostly State Verification with Varying Risk Preferences and LiabilityJOURNAL OF ECONOMIC SURVEYS, Issue 1 2006Gaia Garino Abstract., In the scenario of loan contracts with costly state verification, we examine how the properties of the set of states, different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments. In particular, we show that with risk-averse debtors, a general set of states, a constant observation cost and both unlimited and limited lender liability, the debtor is strictly better off revealing the true state of nature when his realized revenue is low, which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states. If the debtor can destroy revenue or if the debtor is risk neutral, this non-monotonicity of consumption disappears. Moreover, given the loan size, there is more monitoring under debtor-risk aversion than risk neutrality. We present simulations showing that a contract with unlimited lender liability and debtor-risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability. Finally, we discuss the problems of commitment to verification and contract renegotiation in this framework. [source] Risk preference and employment contract typeJOURNAL OF THE ROYAL STATISTICAL SOCIETY: SERIES A (STATISTICS IN SOCIETY), Issue 4 2006Sarah Brown Summary., We explore the possibility that a systematic relationship exists between employment within a particular type of contract and risk preference. We exploit a set of proxies for risk preference, whereby some of the proxies capture risk loving behaviour (expenditure on gambling, smoking and alcohol) whereas others capture risk averse behaviour (expenditure on life and contents insurance, and unearned income). The empirical analysis, based on pooled cross-section data from the UK Family Expenditure Survey, 1997,2000, provides evidence of a systematic relationship between employment contract type and risk preference, with, for example, self-employed workers being more or less likely to engage in the consumption of ,risky' or financial security products respectively. The results are based on the ordered generalized extreme value model, a relatively infrequently used discrete choice model, which allows for ordering and correlation in the alternatives observed. [source] A cohort study to examine whether time and risk preference is related to smoking cessation successADDICTION, Issue 6 2009Rei Goto ABSTRACT Aim To identify whether time and risk preference predicts relapse among smokers trying to quit. Design A cohort study of smokers who had recently started to quit. Time and risk preference parameters were estimated using a discrete choice experiment (DCE). Participants A total of 689 smokers who began quitting smoking within the previous month. Measurements Time discount rate, coefficient of risk-aversion measured at study entry and duration of smoking cessation measured for 6 months. Findings In the unadjusted model, Cox's proportional hazard regression showed that those with a high time discount rate were more likely to relapse [hazard ratio: 1.18, 95% confidence interval (CI): 1.11,1.25]. A high coefficient of risk-aversion reduced the hazard of relapse (0.96, 0.96,0.97). When adjusted for other predictors of relapse (age, gender, self-efficacy of quitting, health status, mood variation, past quitting experience, the use of nicotine replacement therapy, nicotine dependence), the hazard ratios of time discount rate and the coefficient of risk-aversion is 1.17 (95% CI: 1.10,1.24) and 0.98 (95% CI: 0.97,0.99), respectively. Conclusions Those who emphasize future rewards (time,patient preference) and those who give more importance to rewards that are certain (higher risk-aversion) were significantly more likely to continue to abstain from smoking. [source] A Power-Control Theory of Gender and ReligiosityJOURNAL FOR THE SCIENTIFIC STUDY OF RELIGION, Issue 2 2009Jessica L. Collett The fact that women are more religious than men is one of the most consistent findings in the sociology of religion. Miller and Stark (2002) propose that a gender difference in risk preference of physiological origin might explain this phenomenon. While acknowledging the utility of their risk-preference mechanism, we believe that their assumption regarding the genesis of this difference is a premature concession to biology. Returning to Miller's original paper on gender, risk, and religiosity, we draw on power-control theory (PCT), developed in the work of John Hagan and colleagues, to introduce a plausible socialization account for these differences. We evaluate these claims using data from the General Social Survey. Women raised by high-socioeconomic status (SES) mothers are less religious than women raised by low-education mothers, but mother's SES has little effect on men's chances of being irreligious and father's SES has a negligible effect on the gender difference in religiosity. [source] The effects of one night of sleep deprivation on known-risk and ambiguous-risk decisionsJOURNAL OF SLEEP RESEARCH, Issue 3 2007BENJAMIN S. MCKENNA Summary Sleep deprivation has been shown to alter decision-making abilities. The majority of research has utilized fairly complex tasks with the goal of emulating 'real-life' scenarios. Here, we use a Lottery Choice Task (LCT) which assesses risk and ambiguity preference for both decisions involving potential gains and those involving potential losses. We hypothesized that one night of sleep deprivation would make subjects more risk seeking in both gains and losses. Both a control group and an experimental group took the LCT on two consecutive days, with an intervening night of either sleep or sleep deprivation. The control group demonstrated that there was no effect of repeated administration of the LCT. For the experimental group, results showed significant interactions of night (normal sleep versus total sleep deprivation, TSD) by frame (gains versus losses), which demonstrate that following as little as 23 h of TSD, the prototypical response to decisions involving risk is altered. Following TSD, subjects were willing to take more risk than they ordinarily would when they were considering a gain, but less risk than they ordinarily would when they were considering a loss. For ambiguity preferences, there seems to be no direct effect of TSD. These findings suggest that, overall, risk preference is moderated by TSD, but whether an individual is willing to take more or less risk than when well-rested depends on whether the decision is framed in terms of gains or losses. [source] Risk preference and employment contract typeJOURNAL OF THE ROYAL STATISTICAL SOCIETY: SERIES A (STATISTICS IN SOCIETY), Issue 4 2006Sarah Brown Summary., We explore the possibility that a systematic relationship exists between employment within a particular type of contract and risk preference. We exploit a set of proxies for risk preference, whereby some of the proxies capture risk loving behaviour (expenditure on gambling, smoking and alcohol) whereas others capture risk averse behaviour (expenditure on life and contents insurance, and unearned income). The empirical analysis, based on pooled cross-section data from the UK Family Expenditure Survey, 1997,2000, provides evidence of a systematic relationship between employment contract type and risk preference, with, for example, self-employed workers being more or less likely to engage in the consumption of ,risky' or financial security products respectively. The results are based on the ordered generalized extreme value model, a relatively infrequently used discrete choice model, which allows for ordering and correlation in the alternatives observed. [source] Risk perception and risky choice: Situational, informational and dispositional effectsASIAN JOURNAL OF SOCIAL PSYCHOLOGY, Issue 2 2003Xiao-Fei Xie We investigated how situational (gain,loss), informational (opportunity,threat framing) and dispositional (achievement motive and avoidance motive) variables affected opportunity,threat perception and risky choice in managerial decision-making contexts. In Study 1, the risk preference of the participants showed a reflection effect due to situational differences (gain or loss) and a partial framing effect caused by presenting the same choice information in terms of either opportunities or threats. However, both effects were in the opposite direction of predictions from prospect theory. Gains and positive framing enhanced risk-seeking preference whereas losses and negative framing augmented risk-averse preference. Risk-seeking choices were mediated by opportunity perception whereas risk-averse choices were mediated by threat perception. In Study 2, the participants high in achievement motive perceived greater opportunities in a negative situation, and the participants high in avoidance motive perceived greater threats in a positive situation, suggesting that ambition (achievement motive) operates more significantly in the face of adversities whereas cautiousness (avoidance motive) functions more significantly in prosperity. [source] Combining Multiple Quantitative and Qualitative Goals When Assessing Biomanufacturing Strategies under UncertaintyBIOTECHNOLOGY PROGRESS, Issue 4 2005Suzanne S. Farid This paper reports how financial and operational results from bioprocess simulations can be combined with other criteria pertinent to decision-making predictions to provide a more holistic approach to the evaluation of biomanufacturing alternatives. The classical additive weighting method, which is a multiattribute decision-making technique that can account for both the quantitative and qualitative parameters that ultimately need to be considered, is used. Its application is demonstrated through a case study that addresses whether start-up companies should invest in a stainless steel pilot plant or use disposable equipment for the production of early phase clinical trial material. The technique is extended to allow for uncertainty in parameters. An illustration of its use to compare alternatives based on cumulative frequency curves of the aggregate scores is provided. For cases where it is difficult to discriminate between the options, plots of risk versus reward are shown to be useful for identifying the best alternative based on the risk preference of the companyapos;s management. [source] ON THE PREFERENCES OF PRINCIPALS AND AGENTSECONOMIC INQUIRY, Issue 2 2010MARCO CASTILLO One of the reasons why market economies are able to thrive is that they exploit the willingness of entrepreneurs to take risks that laborers might prefer to avoid. Markets work because they remunerate good judgment and punish mistakes. Indeed, modern contract theory is based on the assumption that principals are less risk averse than agents. We investigate if the risk preferences of entrepreneurs are different from those of laborers by implementing experiments with a random sample of the population in a fast-growing, small-manufacturing, economic cluster. As assumed by theory, we find that entrepreneurs are more likely to take risks than hired managers. These results are robust to the inclusion of a series of controls. This lends support to the idea that risk preferences is an important determinant of selection into occupations. Finally, our lotteries are good predictors of financial decisions, thus giving support to the external validity of our risk measures and experimental methods (JEL C93, D81, D86). [source] On the Interaction of Risk and Time Preferences: An Experimental StudyGERMAN ECONOMIC REVIEW, Issue 3 2001Vital Anderhub Experimental studies of risk and time preference typically focus on one of the two phenomena. The goal of this paper is to investigate the (possible) correlation between subjects' attitude to risk and their time preference. For this sake we ask 61 subjects to price a simple lottery in three different scenarios. At the first, the lottery premium is paid ,now'. At the second, it is paid ,later'. At the third, it is paid ,even later,. By comparing the certainty equivalents offered by the subjects for the three lotteries, we test how time and risk preferences are interrelated. Since the time interval between ,now' and ,later' is the same as between ,later' and ,even later', we also test the hypothesis of hyperbolic discounting. The main result is a statistically significant negative correlation between subjects' degrees of risk aversion and their (implicit) discount factors. Moreover, we show that the negative correlation is independent of the method used to elicit certainty equivalents (willingness to pay versus willingness to accept). [source] Developmental insights into experience-based decision makingJOURNAL OF BEHAVIORAL DECISION MAKING, Issue 1 2010Tim Rakow Abstract In three experiments involving children and adults (N,=,324), option payoffs for sure versus risky choices were either described or experienced via observation of 20 outcomes. Choices revealed a description-experience gap for payoffs with rare events, implying greater impact of small probabilities (,.2) for described than for experienced choices. The size of this effect was independent of participant age. Therefore, the role of cognitive limitations in the description-experience distinction remains unclear, as the age groups would have differed in cognitive capacity. Age-related differences in ,sampling style' in decisions from experience were observed. Pre-choice data acquisition changed markedly with age: From frequent alternation between options towards separate systematic exploration of options with increasing age. A fourth experiment, that manipulated sampling style, failed to demonstrate its link to other age-related features of choice (e.g. risk preferences). Our studies illustrate the value of developmental research for testing theoretical claims and revealing novel phenomena in decision research. Copyright © 2009 John Wiley & Sons, Ltd. [source] Costly State Verification with Varying Risk Preferences and LiabilityJOURNAL OF ECONOMIC SURVEYS, Issue 1 2006Gaia Garino Abstract., In the scenario of loan contracts with costly state verification, we examine how the properties of the set of states, different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments. In particular, we show that with risk-averse debtors, a general set of states, a constant observation cost and both unlimited and limited lender liability, the debtor is strictly better off revealing the true state of nature when his realized revenue is low, which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states. If the debtor can destroy revenue or if the debtor is risk neutral, this non-monotonicity of consumption disappears. Moreover, given the loan size, there is more monitoring under debtor-risk aversion than risk neutrality. We present simulations showing that a contract with unlimited lender liability and debtor-risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability. Finally, we discuss the problems of commitment to verification and contract renegotiation in this framework. [source] Farmers' objectives as determinants of organic farming adoption: the case of Catalonian vineyard productionAGRICULTURAL ECONOMICS, Issue 5 2010Zein Kallas Organic farming adoption; Duration analysis; Analytical hierarchy process; Farmers' objectives Abstract This article assesses the decision to adopt organic farming practices. We use Duration Analysis (DA) to determine why farmers adopt organic farming practices and what influences the timing of adoption. We extend previous studies by including farmers' objectives, risk preferences, and agricultural policies as covariates in the DA model. The Analytical Hierarchy Process is used as a multicriteria decision-making methodology to measure farmers' objectives. The empirical analysis uses farm-level data from a sample of vineyard farms in the Spanish region of Catalonia. Farmers' objectives are found to influence the conversion decision. Moreover, farmers who are not risk averse are more likely to adopt organic farming. Results point to the policy changes that have been most relevant in motivating adoption of organic practices. [source] CONTINUOUS-TIME MEAN-VARIANCE PORTFOLIO SELECTION WITH BANKRUPTCY PROHIBITIONMATHEMATICAL FINANCE, Issue 2 2005Tomasz R. Bielecki A continuous-time mean-variance portfolio selection problem is studied where all the market coefficients are random and the wealth process under any admissible trading strategy is not allowed to be below zero at any time. The trading strategy under consideration is defined in terms of the dollar amounts, rather than the proportions of wealth, allocated in individual stocks. The problem is completely solved using a decomposition approach. Specifically, a (constrained) variance minimizing problem is formulated and its feasibility is characterized. Then, after a system of equations for two Lagrange multipliers is solved, variance minimizing portfolios are derived as the replicating portfolios of some contingent claims, and the variance minimizing frontier is obtained. Finally, the efficient frontier is identified as an appropriate portion of the variance minimizing frontier after the monotonicity of the minimum variance on the expected terminal wealth over this portion is proved and all the efficient portfolios are found. In the special case where the market coefficients are deterministic, efficient portfolios are explicitly expressed as feedback of the current wealth, and the efficient frontier is represented by parameterized equations. Our results indicate that the efficient policy for a mean-variance investor is simply to purchase a European put option that is chosen, according to his or her risk preferences, from a particular class of options. [source] Bayesian analysis of plant disease predictionPLANT PATHOLOGY, Issue 4 2002J. E. Yuen Rule-based systems for the prediction of the occurrence of disease can be evaluated in a number of different ways. One way is to examine the probability of disease occurrence before and after using the predictor. Bayes's Theorem can be a useful tool to examine how a disease forecast (either positive or negative) affects the probability of occurrence, and simple analyses can be conducted without knowing the risk preferences of the targeted decision makers. Likelihood ratios can be calculated from the sensitivity and specificity of the forecast, and provide convenient summaries of the forecast performance. They can also be used in a simpler form of Bayes's Theorem. For diseases where little or no prior information on occurrence is available, most forecasts will be useful in that they will increase or decrease the probability of disease occurrence. For extremely common or extremely rare diseases, likelihood ratios may not be sufficiently large or small to substantially affect the probability of disease occurrence or make any difference to the actions taken by the decision maker. [source] A Generalization of the Brennan,Rubinstein Approach for the Pricing of DerivativesTHE JOURNAL OF FINANCE, Issue 2 2003António Câmara This paper derives preference-free option pricing equations in a discrete time economy where asset returns have continuous distributions. There is a representative agent who has risk preferences with an exponential representation. Aggregate wealth and the underlying asset price have transformed normal distributions which may or may not belong to the same family of distributions. Those pricing results are particularly valuable (a) to show new sufficient conditions for existing risk-neutral option pricing equations (e.g., the Black,Scholes model), and (b) to obtain new analytical solutions for the price of European-style contingent claims when the underlying asset has a transformed normal distribution (e.g., a negatively skew lognormal distribution). [source] Stochastic efficiency analysis with risk aversion bounds: a correctionAUSTRALIAN JOURNAL OF AGRICULTURAL & RESOURCE ECONOMICS, Issue 4 2009Jack Meyer A recent paper by Hardaker et al. (The Australian Journal of Agricultural and Resource Economics, 48, 2004a, 253) and book by Hardaker et al. (Coping with Risk in Agriculture, 2004b) describe a procedure for determining an efficient set from among a set of random alternatives. This procedure, called stochastic efficiency with respect to a function (SERF), is claimed to make the same assumption concerning the risk aversion measures as does stochastic dominance with respect to a function (SDRF). This is claim is incorrect. SERF imposes an additional requirement on the risk aversion measures of the decision makers. Both procedures assume a lower and an upper bound on risk aversion, but SERF also assumes that all risk aversion measures are of the same functional form as these lower and upper bound functions. This additional strong requirement on risk preferences implies that the efficient set identified under SERF is usually smaller than that identified using SDRF. [source] | ||||||||||||||||||||||||||||