scholarly journals The Willingness to Pay for Diversification

2021 ◽  
Author(s):  
Ola Mahmoud
Keyword(s):  
Willingness To Pay ◽  
Risk Aversion ◽  
Portfolio Choice ◽  
Loss Aversion ◽  
Fundamental Concept ◽  
Decision Makers ◽  
Risk Averse ◽  
Initial Endowment ◽  
Choice Problem

Diversification is a fundamental concept in economics and finance. This paper argues that decision makers have an intrinsic preference for diversification that is responsive to cost and that this willingness to pay for diversification is driven by risk aversion and loss aversion. In an experiment replicating a portfolio choice problem, the value of diversification is estimated to be at 5% of the initial endowment of approximately $100. Moreover, risk-averse and loss-averse individuals are willing to pay more for diversification. These findings point to the idea that diversification is a fundamental preference and may help explain portfolio choice anomalies such as irrational diversification, the diversification bias, and overdiversification. This paper was accepted by Tomasz Piskorski, finance.

scholarly journals A Theory of Rational Demand for Index Insurance

2016 ◽  
Vol 8 (1) ◽  
pp. 283-306 ◽  
Author(s):  
Daniel J. Clarke
Keyword(s):  
Risk Aversion ◽  
Absolute Risk ◽  
Upper Bounds ◽  
Decision Makers ◽  
Index Insurance ◽  
Risk Averse ◽  
Basis Risk ◽  
Low Level ◽  
Simple Ratio ◽  
Rational Demand

Rational demand for index insurance products is shown to be fundamentally different to that for indemnity insurance products due to the presence of basis risk. In particular, optimal demand is zero for infinitely risk-averse individuals, and is nonmonotonic in risk aversion, wealth, and price. For a given belief, upper bounds are derived for the optimal demand from risk-averse and decreasing absolute risk-averse decision makers. A simple ratio for monitoring basis risk is presented and applied to explain the low level of demand for consumer hedging instruments as a rational response to deadweight costs and basis risk. (JEL D14, D81, G13, G22, Q14)

scholarly journals Modeling of Risk Aversion Linked to Renewable Energy Policy and Decision-Maker Behavior

2022 ◽  
Author(s):  
Dieudonné Dieudo Ecike Ewanga
Keyword(s):  
Risk Aversion ◽  
Decision Maker ◽  
Decision Support Tool ◽  
Renewable Energies ◽  
Decision Makers ◽  
Risk Averse ◽  
Renewable Energy Policy ◽  
Support Tool ◽  
Electricity Grid ◽  
Concave Utility Function

This paper presents the behavior of decision makers, the possible choices and the strategies 1 resulting from the uncertainties related to the integration of renewable energies. Its uncertainties 2 are the risks associated with the volatility of renewable sources, the dynamics of energy production 3 as well as the planning and operation of the electricity grid. The goal is to model the risk-averse 4 decision-maker’s behavior and the choice of integrating renewable energies into the electrical system. 5 Following a bibliographic approach, we expose a methodology to model the decision-maker’s 6 behavior(risk aversion and predilection for risk) to risk taking. The risk-averse decision maker may 7 adopt nonlinear utility functions. Risk aversion is a behavior that reflects the desire to avoid risk 8 decisions and thus reduces the risk of adverse consequences. A decision support tool is provided to 9 the decision-maker to choose a best-fit strategy based on his preferences. The rational and risk-averse 10 decision-maker would seek to maximize a concave utility function instead of seeking to minimize its 11 cost. Taste or aversion to risk can be modeled by a thematic function of utility.

Too Much to Lose: The Influence of Emotional Attachment on Risk Aversion

2020 ◽  
Author(s):  
Andy Lisheng Chan
Keyword(s):  
Risk Aversion ◽  
Loss Aversion ◽  
Risk Averse ◽  
Emotional Attachment ◽  
Risk Seeking ◽  
Seeking Behavior ◽  
The Stability ◽  
Loss Frame ◽  
Gain Frame ◽  
Mean Risk

Current literature suggests that the generalizability of the loss aversion hypothesis and in tandem risk aversion and framing effects may be less stable than previously specified. Hence, the current study seeks to investigate emotional attachment as a potential moderator of loss and subsequently risk aversion, helping inform both fields of economics and psychology in driving better policy and decision-making. 64 Temasek Polytechnic students, aged 16-23, were manipulated with either high or low emotional attachment towards an item and presented with an adapted Asian Disease Paradigm (Tversky & Kahneman, 1981) in either a gain or loss frame as a measure of the individual’s mean risk rating. ANOVA analysis revealed the stability of the loss aversion hypothesis identified in past literature – risk-averse behavior increased when a gain frame was presented, and risk-seeking behavior increased when a loss frame was presented. Critically, emotional attachment was found to moderate loss and risk aversion, validating past theoretical derivations (Ariely, Huber, & Wertenbroch, 2005; Novemsky & Kahneman, 2005): when emotional attachment was higher towards an item, participants displayed more risk-seeking behavior and more risk-averse behavior when in the context of losses and gains respectively, and displayed less risk-seeking and risk-averse behavior when they were less emotionally attached to an item in the same context of a gamble. Theoretical and practical implications of these findings are discussed in the context of nudging.

scholarly journals Short‐term investments and indices of risk

2020 ◽  
Vol 15 (3) ◽  
pp. 891-921
Author(s):  
Yuval Heller ◽  
Amnon Schreiber
Keyword(s):  
Risk Aversion ◽  
Absolute Risk ◽  
Risk Index ◽  
Decision Makers ◽  
Decision Problems ◽  
Risk Averse ◽  
Short Term ◽  
Risky Assets ◽  
Absolute Risk Aversion ◽  
Constant Absolute Risk Aversion

We study various decision problems regarding short‐term investments in risky assets whose returns evolve continuously in time. We show that in each problem, all risk‐averse decision makers have the same (problem‐dependent) ranking over short‐term risky assets. Moreover, in each problem, the ranking is represented by the same risk index as in the case of constant absolute risk aversion utility agents and normally distributed risky assets.

scholarly journals A Portfolio Choice Problem in the Framework of Expected Utility Operators

Mathematics ◽  
2019 ◽  
Vol 7 (8) ◽  
pp. 669 ◽  
Author(s):  
Irina Georgescu ◽  
Louis Aimé Fono
Keyword(s):  
Risk Aversion ◽  
Portfolio Choice ◽  
Expected Utility ◽  
Approximate Calculation ◽  
Optimization Problem ◽  
Fuzzy Numbers ◽  
Optimal Allocation ◽  
General Context ◽  
Abstract Theory ◽  
Choice Problem

Possibilistic risk theory starts from the hypothesis that risk is modeled by fuzzy numbers. In particular, in a possibilistic portfolio choice problem, the return of a risky asset will be a fuzzy number. The expected utility operators have been introduced in a previous paper to build an abstract theory of possibilistic risk aversion. To each expected utility operator, one can associate the notion of possibilistic expected utility. Using this notion, we will formulate in this very general context a possibilistic portfolio choice problem. The main results of the paper are two approximate calculation formulas for the corresponding optimization problem. The first formula approximates the optimal allocation with respect to risk aversion and investor’s prudence, as well as the first three possibilistic moments. Besides these parameters, in the second formula, the temperance index of the utility function and the fourth possibilistic moment appear.

Relative Risk Aversion and Portfolio Choice

2005 ◽  
Author(s):  
Pablo Muñoz Ceballos ◽  
Esteban Flores Díaz
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Portfolio Choice ◽  
Relative Risk Aversion

Portfolio choice with skewness preference and wealth-dependent risk aversion

2019 ◽  
Vol 19 (11) ◽  
pp. 1905-1919
Author(s):  
Congming Mu ◽  
Weidong Tian ◽  
Jinqiang Yang
Keyword(s):  
Risk Aversion ◽  
Portfolio Choice ◽  
Skewness Preference

Eliciting Risk Preferences and Elasticity of Substitution

2020 ◽  
Vol 17 (4) ◽  
pp. 314-329
Author(s):  
Johan Burgaard ◽  
Mogens Steffensen
Keyword(s):  
Risk Aversion ◽  
Discount Rate ◽  
Predictive Power ◽  
Recursive Utility ◽  
Risk Averse ◽  
Indirect Utility ◽  
Consistent Estimation ◽  
On Certainty ◽  
Certainty Equivalents ◽  
Elasticity Of Intertemporal Substitution

Risk aversion and elasticity of intertemporal substitution (EIS) are separated via the celebrated recursive utility building on certainty equivalents of indirect utility. Based on an alternative separation method, we formulate a questionnaire for simultaneous and consistent estimation of risk aversion, subjective discount rate, and EIS. From a representative group of 1,153 respondents, we estimate parameters for these preferences and their variability within the population. Risk aversion and the subjective discount rate are found to be in the orders of 2 and 0, respectively, not diverging far away from results from other studies. Our estimate of EIS in the order of 10 is larger than often reported. Background variables like age and income have little predictive power for the three estimates. Only gender has a significant influence on risk aversion in the usually perceived direction that females are more risk-averse than males. Using individual estimates of preference parameters, we find covariance between preferences toward risk and EIS. We present the background reasoning on objectives, the questionnaire, a statistical analysis of the results, and economic interpretations of these, including relations to the literature.

scholarly journals Relative risk aversion models: How plausible are their assumptions?

2021 ◽  
pp. 104346312199408
Author(s):  
Carlo Barone ◽  
Katherin Barg ◽  
Mathieu Ichou
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Loss Aversion ◽  
Educational Inequality ◽  
Risky Choice ◽  
Relative Risk Aversion ◽  
Downward Mobility ◽  
Educational Decisions ◽  
Empirically Supported ◽  
Occupational Risks

This work examines the validity of the two main assumptions of relative risk-aversion models of educational inequality. We compare the Breen-Goldthorpe (BG) and the Breen-Yaish (BY) models in terms of their assumptions about status maintenance motives and beliefs about the occupational risks associated with educational decisions. Concerning the first assumption, our contribution is threefold. First, we criticise the assumption of the BG model that families aim only at avoiding downward mobility and are insensitive to the prospects of upward mobility. We argue that the loss-aversion assumption proposed by BY is a more realistic formulation of status-maintenance motives. Second, we propose and implement a novel empirical approach to assess the validity of the loss-aversion assumption. Third, we present empirical results based on a sample of families of lower secondary school leavers indicating that families are sensitive to the prospects of both upward and downward mobility, and that the loss-aversion hypothesis of BY is empirically supported. As regards the risky choice assumption, we argue that families may not believe that more ambitious educational options entail occupational risks relative to less ambitious ones. We present empirical evidence indicating that, in France, the academic path is not perceived as a risky option. We conclude that, if the restrictive assumptions of the BG model are removed, relative-risk aversion needs not drive educational inequalities.

scholarly journals Market-based instruments for risk-averse farmers: rubber agroforest conservation in Jambi Province, Indonesia

2016 ◽  
Vol 22 (2) ◽  
pp. 133-155 ◽  
Author(s):  
Utkur Djanibekov ◽  
Grace B. Villamor
Keyword(s):  
Income Inequality ◽  
Risk Aversion ◽  
Real Options ◽  
Risk Averse ◽  
Variance Model ◽  
Income Uncertainty ◽  
Real Options Approach ◽  
Pigovian Taxes ◽  
Rubber Agroforest ◽  
Mean Variance

AbstractThis paper investigates the effectiveness of different market-based instruments (MBIs), such as eco-certification premiums, carbon payments, Pigovian taxes and their combination, to address the conversion of agroforests to monoculture systems and subsequent effects on incomes of risk-averse farmers under income uncertainty in Indonesia. For these, the authors develop a farm-level dynamic mean-variance model combined with a real options approach. Findings show that the conservation of agroforest is responsive to the risk-aversion level of farmers: the greater the level of risk aversion, the greater is the conserved area of agroforest. However, for all risk-averse farmers, additional incentives in the form of MBIs are still needed to prevent conversion of agroforest over the years, and only the combination of MBIs can achieve this target. Implementing fixed MBIs also contributes to stabilizing farmers’ incomes and reducing income risks. Consequently, the combined MBIs increase incomes and reduce income inequality between hardly and extremely risk-averse farmers.

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