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Book part
Publication date: 14 August 2015

Jyoti Rai and Jean Kimmel

Do women exhibit greater financial risk aversion than men? We answer this question using attitudinal and behavioral specifications of risk aversion drawn from the 2010…

Abstract

Do women exhibit greater financial risk aversion than men? We answer this question using attitudinal and behavioral specifications of risk aversion drawn from the 2010 Survey of Consumer Finances (SCF). To approximate attitudinal specification of risk aversion, we use individuals’ self-reported financial risk tolerance. We use individuals’ relative risk aversion, that is, the effect of wealth on the proportion of assets categorized as risky as behavioral specification of risk aversion. We find that while women display greater attitudinal risk aversion, gender difference in behavioral risk aversion depends upon individuals’ marital status and role in household finances. Single women exhibit greater behavioral risk aversion compared to single men. However, this gender difference does not exist when we compare behavioral risk aversion of married women and men in charge of household finances.

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Article
Publication date: 1 February 2000

Robert Hibbard

This paper examines the implications of standard barter models of market equilibrium for financial security returns in New Zealand. The key question addressed is: does the…

Abstract

This paper examines the implications of standard barter models of market equilibrium for financial security returns in New Zealand. The key question addressed is: does the ‘equity premium puzzle’ of Mehra and Prescott (1985) found in the U.S. also hold in ?ew Zealand? To examine the existence of the equity premium puzzle, quarterly financial security returns and consumption data are examined from 1965 to 1997 to calibrate parameters in the Consumption Based Asset Pricing Model. Unlike much of the existing international evidence, this paper corrects for durable goods consumption following the assumptions of the model that all consumption be consumed in a given period. Numerical analyses indicate that the class of models examined are unable to generate equity premia consistent with historical estimates of the equity premium in New Zealand. Due to small sample variability however, while this discrepancy is material in size, the result is not statistically significant.

Details

Pacific Accounting Review, vol. 12 no. 2
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 1 October 2006

Joseph G. Eisenhauer

Conventional measures of risk aversion based on first and second derivatives of utility are strictly local instruments, valid only for infinitesimally small changes in…

Abstract

Purpose

Conventional measures of risk aversion based on first and second derivatives of utility are strictly local instruments, valid only for infinitesimally small changes in wealth. This paper to develop a global index suitable for assessing attitudes toward large‐scale risks.

Design/methodology/approach

Integral calculus is used to measure the geometric area between an individual's actual utility function and a linear function displaying risk neutrality, over the entire range of potential wealth outcomes for a given risk. The area is then converted to an index number.

Findings

Local and global measures of risk aversion yield similar interpersonal comparisons only for small risks; with larger risks, local measures distort interpersonal differences. The analysis also shows that individuals having exponential utility functions evaluate risk exclusively on the basis of wealth dispersion, whereas those with logarithmic or square‐root utilities consider both the mean and variance of wealth.

Research/limitations/implications

The global index is quantifiable if the functional form of utility is known; further research is needed to approximate the index when information about utility is limited.

Practical implications

The most important risks encountered in practice, such as the possibility of unemployment or disability, involve variations in wealth far larger than differential calculus is designed to accommodate. The integral index therefore provides a more appropriate basis for measuring and comparing risk preferences.

Originality/value

The paper provides an innovative geometric interpretation of global risk aversion, and in contrast to local measures, the integral index captures differences in the intensity of an individual's aversion toward risks of various magnitudes.

Details

Studies in Economics and Finance, vol. 23 no. 3
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 13 June 2016

Marie-Hélène Gagnon and Gabriel J. Power

The purpose of this paper is to investigate and test for changes in investor risk aversion and the stochastic discount factor (SDF) using options data on the West Texas…

Abstract

Purpose

The purpose of this paper is to investigate and test for changes in investor risk aversion and the stochastic discount factor (SDF) using options data on the West Texas Intermediate crude oil futures contract during the 2007-2011 period.

Design/methodology/approach

Risk aversion functions and SDFs are estimated using parametric approaches before and after four specific dates of interest. The dates are: the summer 2008 end of the bull market regime; the late 2008 credit freeze trough; the BP Deepwater Horizon explosion; and the Libyan uprising.

Findings

Absolute risk aversion functions and SDFs are significantly flatter (less decreasing in wealth) after the end of the bull market and the credit freeze trough. After these two market reversals, oil market participants were less risk-averse for low levels of wealth but more risk-averse for high wealth levels. Oil market investors also increased their valuation of anticipated future wealth in average states of nature relative to very high or very low-asset return states after reversals. The BP explosion and the Libyan uprising led to steeper risk aversion functions (decreasing more rapidly in wealth) and SDF. Oil market investors were more risk-averse for lower future wealth, but less risk-averse for higher future wealth. Oil market investors increased their valuation of anticipated future wealth in extreme states of nature relative to average states of nature after both dates.

Originality/value

Documenting statistically and economically significant changes in oil market investors’ attitude toward risk and inter-temporal appetite for risk in relation to changes in financial and political conditions.

Details

Review of Behavioral Finance, vol. 8 no. 1
Type: Research Article
ISSN: 1940-5979

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Book part
Publication date: 3 June 2008

Glenn W. Harrison and E. Elisabet Rutström

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the…

Abstract

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments.

Details

Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

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Article
Publication date: 5 May 2000

Abdullahi O. Abdulkadri and Michael R. Langemeier

A farm household consumption model based on the life‐cycle permanent income hypothesis (LPIH) has been specified and the Euler equations derived in this analysis…

Abstract

A farm household consumption model based on the life‐cycle permanent income hypothesis (LPIH) has been specified and the Euler equations derived in this analysis. Estimation of the of the Euler equations using farm household consumption data provided estimates for the intertemporal elasticity of substitution and the coefficient of relative risk aversion. These parameters differ among the farm enterprises in which the households were engaged. Estimates for the intertemporal elasticity of substitution and the coefficient of relative risk aversion ranged from 0.158 to 0.351 and from 2.849 to 6.329, respectively. Results also provide further evidence that the LPIH is valid for modeling farm household consumption.

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Article
Publication date: 26 July 2013

Amy Khuu and Ernst Juerg Weber

In Australia broadacre crops can be insured against hail and fire damage and some other perils but not against losses caused by drought, flood or frost. The purpose of

Abstract

Purpose

In Australia broadacre crops can be insured against hail and fire damage and some other perils but not against losses caused by drought, flood or frost. The purpose of this paper is to investigate the private provision of crop insurance in Western Australia.

Design/methodology/approach

A farm survey was conducted with the cooperation of dryland farmers belonging to Western Australian grower groups. The willingness to pay for hail insurance is modelled as a function of risk aversion, risk of crop failure and government assistance; and the effect of expected crop yield in t/ha on the crop area is investigated.

Findings

The empirical analysis shows that the coefficient of relative risk aversion is 2.7. An increase in the variability of crop yield by 20 per cent, which may be caused by future climate change, would raise the willingness to pay for crop insurance one‐to‐one by 20 per cent. Adverse selection plays a minor role because almost all farmers buy full coverage for hail insurance and associated risks. A future supplier of multi‐peril crop insurance must, however, consider the potential for ex ante moral hazard because the size of the crop area depends on the expected crop yield in t/ha.

Social implications

The Global Financial Crisis has provided a stark reminder that society crucially depends on the efficient and fair allocation of risk. Climate change threatens the livelihood of farmers and food security. Private multi‐peril crop insurance, which has yet to emerge, would improve the welfare of rural populations and the efficiency of farming.

Originality/value

Few empirical studies deal with the private provision of multi‐peril crop insurance because the market for multi‐peril crop insurance fails worldwide and private insurance does not exist. In this study, Australian crop insurance serves as a proxy to gain an understanding of multi‐peril crop insurance.

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Book part
Publication date: 18 December 2016

C. Bram Cadsby, Fei Song and Francis Tapon

We demonstrate in a laboratory experiment that the effectiveness of performance-contingent incentives is inversely related to risk-aversion levels. For about 16.5% of

Abstract

We demonstrate in a laboratory experiment that the effectiveness of performance-contingent incentives is inversely related to risk-aversion levels. For about 16.5% of participants, performance fails to improve under performance-pay, and the probability of such failure increases with risk-aversion. This phenomenon works in part through the reduced effort level of more risk-averse individuals when effort level is positively correlated with risk exposure. It is also associated with higher self-reported levels of stress by more risk-averse people working under performance-contingent pay. We find no evidence of such stress causing decrements in the quality of effort affecting performance after controlling for effort level. However, controlling for effort, more risk-averse participants perform better under a fixed salary, leaving less room for improvement under performance-pay.

Details

Experiments in Organizational Economics
Type: Book
ISBN: 978-1-78560-964-0

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Article
Publication date: 14 January 2021

Ruojin Zhang, Dan Fan, Gene Lai, Junqian Wu and Jungong Li

Agricultural insurance has become increasingly important to farmers' livelihood and production in rural China. Yet despite the enormous governmental subsidizing efforts…

Abstract

Purpose

Agricultural insurance has become increasingly important to farmers' livelihood and production in rural China. Yet despite the enormous governmental subsidizing efforts, the insurance participation rate remains below expectations. This study revisits the linkage between farmers' risk attitudes and crop insurance utilization by providing a cross-cutting perspective such that the role of risk aversion is re-scrutinized in Chinese “kindred” village economies.

Design/methodology/approach

The authors administrated a lottery-based multiple price list (MPL) experiment by recruiting rice farmers from 12 villages in Sichuan province in southwestern China. Using the experimental data, farmers' risk attitudes are assessed and coefficients of risk aversion are estimated within the rank-dependent expected utility (RDEU) framework by maximizing a structured likelihood function.

Findings

This study provides substantiating evidence that rice farmers in southwestern China exhibit relatively high risk aversion. The authors also provide suggestive evidence of the positive relationship between farmers' risk aversion and crop insurance utilization. In addition, findings reveal that kinship network has a negative effect on crop insurance utilization, such that farmers who are connected in higher degree of kinship network have lower likelihood of crop insurance utilization, which suggests that kinship network may be substitute for formal crop insurance. Result also demonstrates that the incentive effect of risk aversion on farmers' crop insurance participation manifests differently depending on the degree of kinship network in rural China.

Originality/value

This study provides a cross-cutting perspective by scrutinizing the effects of farmers' risk attitudes and kinship network on crop insurance participation in rural China, which has received relatively little attention in the literature. Conclusions on the effects of risk aversion on crop insurance participation have been mixed in previous studies. In addition, to the best of our knowledge, little has been done to explicitly examine the influence of social proximity and networks on farmers' insurance uptake. This study attempts to fill both gaps. This study provides new insights which might shed lights on the understanding of farmers' crop insurance participation in rural China.

Details

Agricultural Finance Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 10 July 2017

Rattaphon Wuthisatian, Federico Guerrero and James Sundali

The purpose of this paper is to suggest that a fundamental cause of market booms and busts is that investor risk attitudes change during market booms. Specifically, the…

Abstract

Purpose

The purpose of this paper is to suggest that a fundamental cause of market booms and busts is that investor risk attitudes change during market booms. Specifically, the authors propose that an investor’s risk aversion falls as (s)he attempts to “keep up with the Joneses.” This paper studies changing risk attitudes induced by social interactions, and shows that risk-seeking behavior that is initially successful may induce copycat behavior and lead individuals in the same peer group to reduce their degree of risk aversion to attempt to obtain similar rewards, a phenomenon we call “Gain attraction in the presence of social interactions.”

Design/methodology/approach

The authors propose a new theoretical model that incorporates the social interaction term into the value function of prospect theory. The modified value function empowers the standard prospect theory by introducing the idea that people often compare themselves to others and then compare their gains to the gains of others. The model predicts that, if people exhibit some degree of envy, they will treat the observed utility achieved by others as destination points and will reposition themselves to the new reference points, and at that point their willingness to accept risk dramatically increases.

Findings

The theoretical model is tested empirically against experimental data and survey data. Consistent with the theoretical prediction, the experimental results suggest that, after subjects observed the behavior of the leading investor in the controlled laboratory condition, there was a significant increase in risk-taking behavior. The survey results further confirm that envy is an emotional force behind the dissatisfaction and disappointment among investors when they miss available opportunities that others were able to take advantage of.

Originality/value

This study provides evidence that investment decisions are not made in a social vacuum by isolated individuals, but rather in social settings in which individuals are influenced by the actions and outcomes of their peers. The study also opens up a new research avenue that the reduction in risk aversion induced by peer effects may be an important element explaining how greed is transmitted across the economy during times of financial boom, thus helping to fuel the flames of financial crises.

Details

Review of Behavioral Finance, vol. 9 no. 2
Type: Research Article
ISSN: 1940-5979

Keywords

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