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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 wealth…

435

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

Keywords

Article
Publication date: 1 January 2013

Martin R.W. Hiebl

Risk aversion is an important characteristic associated with family firms. Despite growing literature in recent years, a consistent picture of what we know about the risk aversion

4481

Abstract

Purpose

Risk aversion is an important characteristic associated with family firms. Despite growing literature in recent years, a consistent picture of what we know about the risk aversion of family firms has not evolved. Thus, this paper presents a systematic overview of whether family firms are found to be more risk averse than non‐family firms, the factors influencing the risk aversion of family firms and the outcomes of risk aversion.

Design/methodology/approach

This paper follows the tenets of Tranfield et al. for conducting a systematic literature review. Following a keyword search and an assessment of fit for this review, 29 papers were analyzed with respect to bibliographical information, research design and findings.

Findings

Most studies find that family firms are indeed more risk‐averse than non‐family firms. However, some findings advance the notion that this phenomenon strongly depends on the situation of the family firm and that the controlling family may take irrational risks to secure control over the firm. From content analysis, five clusters of factors increasing or decreasing the risk aversion of family firms and six clusters on the outcomes of risk aversion are derived.

Research limitations/implications

A broad array of potentially fruitful research directions is presented. Specifically, more qualitative research on risk aversion in family firms is needed, as well as research that takes into account the situational factors and the reactions of the financial services industry to the risk‐avoiding behavior of family firms.

Originality/value

This paper represents the first comprehensive literature review on risk aversion in family firms.

Details

The Journal of Risk Finance, vol. 14 no. 1
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 20 June 2017

Pingying Zhang and Kevin W. Cain

Entrepreneurial intention is regarded as a useful and practical approach to understanding actual entrepreneurial behavior. Planned behavior has been widely applied to examine…

2147

Abstract

Purpose

Entrepreneurial intention is regarded as a useful and practical approach to understanding actual entrepreneurial behavior. Planned behavior has been widely applied to examine entrepreneurial intention. Nevertheless, how risk aversion affects entrepreneurial intention using the model of planned behavior is not well understood. The purpose of this paper is to develop an integrated model based on planned behavior to examine the direct and indirect effect of risk aversion on entrepreneurial intention concurrently.

Design/methodology/approach

The paper first uses factor analysis to study the latent constructs underlying determinants of planned behavior, risk aversion, and entrepreneurial intention. Then, it applies the technique of structural equation modeling to explore relationships among latent constructs. There are 306 survey responses collected from dental school students to run the analysis.

Findings

The determinants of planned behavior are positively associated with entrepreneurial intention. There is no direct relationship between risk aversion and entrepreneurial intention. Risk aversion only indirectly reduces entrepreneurial intention through determinants of planned behavior.

Research limitations/implications

The results of the integrated model may be constrained by the sample context of dental students. Replicating the model by using other samples with various educational backgrounds can strengthen the implication of the study. Another limitation is the weakness of the cross-sectional study design, leaving room for improvement by using longitudinal data in the future.

Practical implications

Risk aversion only indirectly reduces entrepreneurial intention. To establish an environment with a strong entrepreneurial intention, a focus on developing a positive attitude and strengthening entrepreneurial skills are perhaps more fruitful than lowering risk aversion. This study also suggests that non-business students may need additional business education to improve the perception of self-efficacy.

Originality/value

The integrated model of this paper is original. The development of the model draws support from planned behavior adjusted to the context of starting a business.

Details

International Journal of Entrepreneurial Behavior & Research, vol. 23 no. 5
Type: Research Article
ISSN: 1355-2554

Keywords

Article
Publication date: 12 November 2018

Denghui Chen

The purpose of this paper is to present theoretical and empirical support that the fear component associated with rare events has an impact on risk premium and market returns.

Abstract

Purpose

The purpose of this paper is to present theoretical and empirical support that the fear component associated with rare events has an impact on risk premium and market returns.

Design/methodology/approach

Extension of jump-diffusion model to extract the fear component from representative agent risk aversion, Standard VAR and impulse response function analysis, Event study analysis.

Findings

The model implicates that investor fear of tail jumps in the financial market impacts equity risk premium. The empirical findings show both positive stock and monetary policy shocks decrease investor’s fear. It can be attributed to that a bullish stock market and an increase in interest rate reflects expanding economy, and it leads to a decrease in fear. Moreover, a surprise decline in the expected short-term rate has a mixed impact on tail risk aversion. A plausible explanation is that investors believe a surprise drop in an expected short-term rate reflects a fast deteriorating economic outlook during unconventional monetary policy period.

Originality/value

This paper provides theoretical framework to decompose risk aversion into two separate components: one component associated with daily volatility, and the fear component associated with rare events. The study uses risk premiums decomposed from Chicago Board Options Exchange volatility index as proxies for the two components of risk aversion, and then utilizes standard value at risk and event study analysis to show the fear component plays a role in risk premium and market return.

Details

The Journal of Risk Finance, vol. 19 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 25 June 2021

John E. Grable and Eun Jin Kwak

Using data obtained from 525 individuals who were surveyed during early spring 2020, this study addressed three aims: (1) to ascertain the degree to which disappointment aversion

Abstract

Purpose

Using data obtained from 525 individuals who were surveyed during early spring 2020, this study addressed three aims: (1) to ascertain the degree to which disappointment aversion and expectation proclivity are related; (2) to identify who is most likely to exhibit patterns of disappointment aversion; and (3) to determine to what extent the combination of disappointment aversion and expectation proclivity is associated with financial risk aversion.

Design/methodology/approach

Several analytic methods were used in this study. Descriptive statistics were calculated for each of the measures examined in this study. Correlation, analysis of variance (ANOVA) and regression techniques were used to estimate associations between and among the variables of interest in this study.

Findings

A negative relationship between disappointment aversion and expectation proclivity was noted, which is counter to conventional thinking. It is traditionally thought that those who establish high expectations will experience the greatest disappointment when choice outcomes fall below expectations. In this study, it was determined that when a financial decision-maker consistently establishes high outcome expectations and results fall below expectations, the financial decision-maker feels less disappointment. More precisely, those who consistently establish high expectations tend to be more disappointment tolerant than others.

Research limitations/implications

This paper provides evidence that categories of disappointment aversion and expectation proclivity are associated with financial risk aversion and certain demographic characteristics.

Practical implications

This paper adds support for assertions made in the International Journal of Bank Marketing (IJBM) that it is important for financial service professionals and bankers to manage customer expectations to reduce disappointment with products and services. This paper shows that combinations of disappointment aversion and expectation proclivity are related to the financial risk aversion of customers.

Social implications

Findings from this paper indicate that a commonly used heuristic that decision-makers should reduce expectations to avoid disappointment may not be accurate or particularly useful in the context of financial decision-making.

Originality/value

Findings from this study add to the existing body of literature by showing that aversion to disappointment and the establishment of expectations, while distinct concepts, are interrelated.

Details

International Journal of Bank Marketing, vol. 39 no. 7
Type: Research Article
ISSN: 0265-2323

Keywords

Article
Publication date: 2 March 2020

Yan Song, Xin Yun Li, Yi Li and Xianpei Hong

The purpose of this paper is to establish a deterministic equivalent income model (DEIM) based on the risk cost (RC) and risk aversion of investors. The model fully considers both…

Abstract

Purpose

The purpose of this paper is to establish a deterministic equivalent income model (DEIM) based on the risk cost (RC) and risk aversion of investors. The model fully considers both subjective and objective factors that affect risk investment and reasonably evaluates risk investment schemes to choose the correct investment scheme and gain greater investment returns.

Design/methodology/approach

The utility function is used to measure the extent to which an investor is satisfied by investment returns in various scenarios. Risk aversion expresses subjective attitude of investors to risk. RC represents risk loss in currency. This methodology is based on risk aversion function, utility function and RC theory to establish DEIM.

Findings

This study shows that investors with different risk preferences have different certainty equivalent returns (CER), so their choices of investment options change accordingly.

Practical implications

In this paper, the authors use DEIM to test an investment case and conclude that the CER and investment scheme both change with different risk preferences. At the same time, case analysis shows that DEIM is reasonable and stable when evaluating risk investment schemes.

Originality/value

In this study, the authors innovate by introducing both the RC and risk aversion degree into risk investment schemes evaluation and by deriving a utility function from the absolute risk aversion function to build a utility decision matrix and establish DEIM. The model combines the subjective and objective factors that influence risk investment decisions.

Details

Kybernetes, vol. 50 no. 2
Type: Research Article
ISSN: 0368-492X

Keywords

Book part
Publication date: 23 October 2023

Glenn W. Harrison and J. Todd Swarthout

We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset…

Abstract

We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset of CPT parameters, or more simply assumes CPT parameter values from prior studies. Our data are from laboratory experiments with undergraduate students and MBA students facing substantial real incentives and losses. We also estimate structural models from Expected Utility Theory (EUT), Dual Theory (DT), Rank-Dependent Utility (RDU), and Disappointment Aversion (DA) for comparison. Our major finding is that a majority of individuals in our sample locally asset integrate. That is, they see a loss frame for what it is, a frame, and behave as if they evaluate the net payment rather than the gross loss when one is presented to them. This finding is devastating to the direct application of CPT to these data for those subjects. Support for CPT is greater when losses are covered out of an earned endowment rather than house money, but RDU is still the best single characterization of individual and pooled choices. Defenders of the CPT model claim, correctly, that the CPT model exists “because the data says it should.” In other words, the CPT model was borne from a wide range of stylized facts culled from parts of the cognitive psychology literature. If one is to take the CPT model seriously and rigorously then it needs to do a much better job of explaining the data than we see here.

Details

Models of Risk Preferences: Descriptive and Normative Challenges
Type: Book
ISBN: 978-1-83797-269-2

Keywords

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 Survey of…

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.

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 strengths…

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

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

Keywords

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