Increased Risk Aversion Research Articles

Optimal strategies for a capital constrained contract-farming supply chain with yield insurance

We consider a capital-constrained contract-farming supply chain with a risk-averse farmer and a risk-neutral agro-dealer, where the farmer faces some yield uncertainty that can be covered by insurance. Using the Stackelberg model, we derive the optimal strategies on the insured level, production and wholesale price. The result shows that farmers with low risk aversion tend not to be insured, while those with high risk aversion tend to insure. Further analysis indicates that, as the degree of the farmer’s risk aversion increases, the farm size decreases, but the yield per unit area and the wholesale price of the agricultural product increases. In addition, yield insurance and premium subsidies can lead to a decrease of the yield per unit area. However, the expansion of the farm size can compensate for the inhibitory effect of the decrease of yield per unit area on the total yield, and thus the total yield increases. We also find that when the premium subsidy rate is low, the yield insurance’s value to farmers is negative. Moreover, the yield insurance’s value to farmers increases with respect to the bank’s interest rate.

The Early‐life Political Event Experience of the Chair of the Board and the Firm's Innovation Decision

AbstractEarly life experience may influence an executive's psychology and behaviour, which affects the company's financial policy. Using a unique early life political event, this paper finds that the ‘Down to the Countryside’ experience of board chairs in China increases their risk aversion and reduces the firms’ innovation investments. Such an effect is robust to a series of alternative tests. Further analysis shows that this impact is not weakened by chairs’ higher education, and their increased risk aversion results in the chairs being more prudent and making more efficient investment decisions.

Determinants of banks’ liquidity: A French perspective on interactions between market and regulatory requirements

Abstract The paper investigates the impact of solvency and liquidity regulation as well as market shocks on banks’ balance sheet structure. It contributes in particular to the debate on the use of liquidity buffers by banks, as initiated by Goodhart’s (2008), “last taxi” argument. The volatility of long-term markets observed during the Covid-19 pandemic shows that periods of sharp increase in risk aversion still result in liquidity strains for banks. The latter react differently depending on the diversity of their funding sources and their risk profile. Indeed, during a crisis, due to interactions between funding and market liquidity, as well as regulatory constraints, one may wonder whether banks may increase or decrease liquidity. According to a simple portfolio allocation model banks’ liquidity increases when the regulatory constraint is binding, as banks hoard extra liquidity, while they do not if the regulatory constraint is not binding. We show that in times of crisis, measured by large deviations of a financial variable capturing international markets’ risk aversion, French banks actually decreased the liquidity coefficient, with our results mostly driven by less liquid banks. However, while we do find that the solvency ratio has a weakly significant effect on the liquidity coefficient, we were not able to establish a firm causal relationship between the two variables on the basis of Granger causality tests.

Higher Order Risk Attitudes in the Time of COVID-19: An Experimental Study

The coronavirus disease (COVID-19) represents a large increase in background risk for individuals. Like the COVID-19 pandemic, extreme events (e.g. financial downturns, natural disasters, war and conflict) have been shown to change attitudes towards risk. Using a risk apportionment approach, we examine whether risk aversion as well as higher order risk attitudes (prudence and temperance) have changed during COVID-19. This methodology allows us to measure model-free higher order risk attitudes. We include prudence and temperance as higher order measures, as these two have been largely understudied under extreme events but are determinants of decisions related to the health and financial domains. Once we account for socio-demographic characteristics, we find an overall increase in risk aversion during COVID-19. We also find similar results using a hypothetical survey question which measures willingness to take risks. We do not find changes in prudence and temperance using the risk apportionment methodology.

Why do people persist in sea-level rise threatened coastal regions? Empirical evidence on risk aversion and place attachment

Climate change is projected to increase the number of extreme weather events, which may lead to cascading impacts, feedbacks, and tipping points not only in the biophysical system but also in the social system. To better understand societal resilience in risky environments, we analyzed people’s attachment to place, their willingness to take risks, and how these change in response to extreme weather events. We conducted a survey with 624 respondents at the forefront of climate change in Asia: the river deltas in Bangladesh and Vietnam. Our findings confirm that most people prefer staying. Yet crucially, we find that (i) self-reported experiences of climate-related hazards are associated with increased risk aversion and place attachment, reinforcing people’s preferences to stay in hazardous environments; (ii) people with experiences of hazards are more likely aspiring to move to high-income destinations, arguably being beyond the reach of their capacities; and (iii) changes in aspirations to move abroad are connected to the changes in risk aversion and place attachment. The fact that preferences are associated with cumulative experiences of hazards and interact with aspirations to move to high-income destinations may contribute to our understanding of why so many people stay in hazardous environments.

Incentives modulate arousal and attention in risky choice

We investigated the effect of large changes in financial incentives on the process of decision-making by measuring autonomic arousal and visual attention during an incentivized lottery-choice task. High real stakes were accompanied by increased risk aversion and physiological arousal, and by shifts in attention toward safer alternatives. These effects were manifested both within and between individuals. We find no evidence that heightened risk aversion is a mistake. To capture the interactions of arousal and attention with subjective value during evidence accumulation, we developed and fit a new arousal-modulated Attentional Drift Diffusion model (aADDM). Our computational model demonstrates that arousal amplifies discounting of high-valued outcomes when participants attended to low-valued outcomes. Arousal and attention, and their interaction, are integral to the process of decision-making under risk.

The Shadow of the Epidemic: Long-term Impacts of Meningitis Exposure on Risk Preference and Behaviors

This study investigates the long-term effects of exposure to infectious disease on individuals’ risk preference and behaviors. Using nationally representative datasets in China, we adopt a differences-in-differences strategy to evaluate the long-term impacts of exposure to China’s 1967 meningitis epidemic. We find that intense exposure to the meningitis epidemic during childhood led to increased risk aversion. In addition, we show that exposure to the meningitis epidemic decreased risky behaviors, including financial investment, credit card usage, entrepreneurship, and migration.

Determinants of the Bitcoin Performance during the COVID-19 Pandemic Period: How Can We Measure the Fear?

Purpose – This paper tries to contribute to financial modelling and decision-making in investment strategies by presenting that sentiment analysis using Google trends can explain the performance of Bitcoin (BTC) during the COVID-19 pandemic period (1/1/2020-26/3/2021). The information from social media regarding people’s interest could be beneficial for investors and practitioners. Design/methodology/approach – We employ a code which measures and indexes the Google searches for terms related to COVID-19 and BTC. These indices are included in a GARCH(1,1) model as explanatory variables in order to enable us to identify the variables that influenced the BTC performance during the COVID-19 period.Findings – The empirical findings show that COVID-19 fear increases risk aversion and has a negative impact on BTC prices. The increased interest regarding BTC, as expressed by Google searches, has a positive impact on the BTC prices. However, when this information arrives with a 1-day lag, the impact is negative because the increased interest of the previous day has already been incorporated in the previous day’s BTC price. Research limitations/implications – This study focuses on the number of Google searches. Further research on sentiment analysis should be done using textual analysis. This will allow for more accurate sentiment analysis and thus more accurate financial models which will include not only economic variables, but behavioral also. Practical implications – This note could be useful for scholars and practitioners who are interesting in financial modelling, investments, and decision-making. The methodological approach can be applied in any asset class, e.g. stocks, bonds, currencies etc., thus, there are no significant limitations to our research.

Does haze cloud decision making? A natural laboratory experiment

The adverse impact of haze on health and its association with a range of economic outcomes have received increasing attention in the literature. A natural laboratory experiment involving more than 600 subjects enables a first attempt at investigating the causal effect of haze, proxied by particulate matter of up to 2.5 microns in diameter (PM2.5) on decision making. This study was conducted in Beijing in October 2012 over five days with highly varying levels of PM2.5, which only became commonly known in China in 2013. We observed several effects associated with an increase in haze. In terms of individual decision making, we found increases in risk aversion and ambiguity aversion over gains. In terms of other-regarding behavior, subjects became less prosocial, giving less in a dictator game, contributing less in a public goods game, and reciprocating less in a sequential prisoners’ dilemma. Our results underpin several reported findings in the literature linking short-term variations in air quality to real-world economic variables, including stock market performance, worker productivity, movie attendance and revenue, criminal activities, and subjective wellbeing.

There is no smoke without a fire: The effect of government interventions in less advanced economies

The lack of liquidity in the interbank market during the crisis of 2007–2011 led governments to impose different policies to rescue their countries’ banking sectors. While in advanced countries interventions in the banking sector were mostly related to a lack of liquidity and significant asymmetric information regarding counterparty risk, in many less advanced countries they had a precautionary motive. In our article, we investigate the effectiveness of policy interventions on healthy banking markets, with possible negative spill-over effects from other countries. To this extent, we use an event study methodology to test the effect of liquidity and financial sector policy announcements on interbank spread changes in six Central and Eastern European (CEE) countries over the period between 2007 and 2011. We find that standard liquidity interventions did not provide effective stabilization. In fact, our evidence suggests that the spread widened after their announcement, probably as a result of the negative signal and consequently increased risk aversion of banks. In such situations, regulators should consider policy instruments that aim to decrease uncertainty in the market.

Are Passive Institutional Investors Engaged Monitors or Impatient Owners? Both!

We differentiate the effects of passive institutional investors on firms’ innovation activities and innovation strategies. With larger passive institutional ownership, while firms’ countable innovation activities increase, they shift their innovation strategies by focusing more on exploitation of existing knowledge rather than exploration of new technology. Enhanced monitoring by passive institutional investors through active votes could explain their positive effects on firms’ innovation activities. Increasing risk aversion by passive institutional investors appears the underlying force that drives firms’ shift to incremental innovation. Our paper uncovers a subtle relation between institutional investors and innovation, which is largely ignored by earlier studies.

Age-dependent Risk Aversion: Re-evaluating Fiscal Policy Impacts of Population Ageing

This study revisits optimal fiscal policies in response to population ageing by introducing an age-dependent increasing risk aversion assumption into an OLG model with risk-sensitive preferences. Under this specification, the policy evaluation factors in the welfare cost of policy-induced uncertainties and suggests that, based on future generations’ welfare, financing population ageing by either reducing social security benefits or extending the retirement age may not be as strongly preferred over raising the payroll tax rate as prior studies have suggested. Varying risk aversion also emphasizes the role of precautionary savings that causes individuals to respond slightly differently to changes in demographic structures and price variables. This, in turn, influences the redistribution of life-cycle variables and transition dynamics of aggregate variables.

Perceived to slack: secondary securitization and multilateral treaty ratification in Israel

ABSTRACT This study emphasizes the place that cognitive processes rather than objective concerns have in ratification of multilateral treaties. We argue that secondary securitization by non-security experts hinders treaty ratification. When security is at stake, the potential costs of undesired action by the treaty’s IO are deemed higher, risk-aversion increases, and asymmetry among the member states’ policy perceptions is greater. Thus, our secondary securitization model improves over existing explanations of multilateral treaty ratification by assuming that national selfishness drives treaty (non)ratification, but not necessarily in a rational way. We support our argument with survival analysis regarding the ratification process in Israel of 243 treaties, based on documents retrieved from official archives, and controlling for a variety of competing explanations. We break securitization into objective and subjective components and correct for the possibility of undocumented acts of securitization. Our results are robust to all this. We follow with discourse and content analysis of official discussions of three human rights treaties (ICCPR, ICESCR, and CEDAW). We innovate theoretically by distinguishing secondary from primary securitization, and by combining Securitization and Principal-Agent theories. We believe our results travel well for other countries in which security concerns overshadow aspect of civilian life, and IOs are regarded with suspicion.

Terror attacks and individual investor behavior: Evidence from the 2015–2017 European terror attacks

We study how terrorism impacts individual investor behavior. We utilize international brokerage data to study how individual investors react in the immediate aftermath of a terror attack. We focus on seven major terror attacks that occurred during the European terror attacks of 2015–2017. We find that investors lower their trading activity, use less leverage, and engage in less short selling. This effect is observed on a worldwide basis, with the effects being stronger in the country of attack. The changes in investor behavior can be explained by increased risk aversion and personal loss experiences. The decrease in trading activity leads to an increase in investors’ return on investments.

Determinants of Banks’ Liquidity: A French Perspective on Interactions between Market and Regulatory Requirements

The paper investigates the impact of solvency and liquidity regulation on banks' balance sheet structure. The Covid-19 pandemics shows that periods of sharp increase in risk aversion often result in liquidity strains for banks due to the volatility of long-term funding markets.According to a simple portfolio allocation model banks’ liquidity increases when the regulatory constraint is binding. We provide evidence, using the “liquidity coefficient” implemented in France ahead of Basel III's Liquidity Coverage Ratio, of a positive effect of the solvency ratio on the liquidity coefficient. We also show that in times of crisis, measured by financial variables, French banks actually decreased the liquidity coefficient, with the transmission channel materialising mainly on the liability side.

Target-Date Funds, Glidepaths, and Risk Aversion

Target-date funds feature asset allocations that become increasingly conservative as investors approach retirement. An important shortcoming of this strategy is that it is suboptimal in terms of capital accumulation, which begs the question of why these funds are so popular. A possible answer is that investors become more risk averse as they age, gradually favoring more downside protection as they approach retirement. The main issue explored in this article is how much more risk averse would investors need to become during their working years to select asset allocations similar to those in target-date funds; the evidence here shows that investors would have to roughly double their risk aversion during the last 25 years of their working period. An intuitive interpretation of this result, based on how much an individual would pay to avoid a gamble, is also discussed. <b>TOPICS:</b>Equity portfolio management, retirement, wealth management, risk management <b>Key Findings</b> • This article explores why target-date funds switch from a goal of capital accumulation early in the accumulation period to the goal of downside protection as individuals approach retirement. • This switch is motivated by the increase in risk aversion observed as individuals age, which leads them to value downside protection more as they approach retirement. • The evidence here shows that if individuals roughly double their risk aversion during the last 25 years of their working period, they would choose asset allocations similar to those featured by the glidepaths of target-date funds.

Natural disasters and risk aversion

The havoc brought by extreme weather events triggers well-documented adverse effects on human health, communities’ resources and economic development. In this paper, we focus on the consequences of disasters on financial markets and infer the impact of major catastrophes on the risk-taking behavior of investors from U.S. municipal bond transactions. The findings strongly support the conjecture that natural disasters cause a statistically and economically significant increase in risk aversion at the local level. Although the change in investors’ behavior appears to be temporary, this increase in risk aversion may dampen the stimulus effect of disaster financial assistance programs, slow the recovery phase and augment the perceived value of risk management programs and infrastructures.

Becoming sensitive: Males’ risk and time preferences after the 2008 financial crisis

Abstract This paper presents evidence suggesting men’s (but not women’s) risk and time preferences have systematically become sensitive to local economic conditions since the global financial crisis (GFC) of 2008. Studying longitudinal, nationally representative data for 22,579 Australian-based respondents in up to 11 survey waves from 2002 to 2015, men respond with increased risk aversion and impatience to a rise in their region’s unemployment rate – but only since 2008. We find no such relationship for women or before the crisis. This conclusion persists when accounting for (i) fixed effects on the individual, regional, and time level, (ii) demographics, (iii) national economic conditions, as well as (iv) the respondent’s employment situation, income, and wealth. Results prevail when employing an instrumental variable approach based on initial industry shares in the respondent’s region. Exploring one potential mechanism, higher regional unemployment rates are also linked to men (but not women) being more unhappy since 2008. This ‘happiness channel’, however, can only partially explain the link between the local unemployment rate and risk preferences.

4139 Risk Aversion in Lung Transplantation: Organ Procurement Organizations Differ in Willingness to Pursue Non-ideal Donor Organs

OBJECTIVES/GOALS: Lung transplant (LTx) candidates benefit from use of non-ideal donor organs. Each organ procurement organization (OPO) defines “acceptable” donor organs introducing unmeasured variation in donor pursuit. We characterized non-ideal donor pursuit among OPOs to identify drivers of risk aversion in LTx. METHODS/STUDY POPULATION: We queried the UNOS registry for adult donors who donated ≥1 organ for transplantation from 12/2007-12/2018. Non-ideal donors were those with any of age&gt;50, smoking history ≥20 pack-years, PaO2/FiO2 (P/F) ratio&lt;350, donation after cardiac death (DCD) status, or CDC increased risk (IRD) status. Non-ideal donor pursuit rate was defined as the proportion of non-ideal donors at each OPO from whom consent for lung donation was requested with lower numbers indicating increased risk aversion. We estimated the correlation between non-ideal and overall donor pursuit using a Spearman correlation coefficient. Adjusted non-ideal donor pursuit rates were estimated using multivariable logistic regression. RESULTS/ANTICIPATED RESULTS: Overall, 18,333 deceased donors were included and classified as ideal or non-ideal. Among 58 OPOs, rates of non-ideal donor pursuit ranged from 0.24-1.00 Figure). Of 5 non-ideal characteristics, DCD and IRD status were associated with the most and least risk aversion, respectively. Non-ideal donor pursuit was strongly correlated with overall donor pursuit (r = 0.99). On adjusted analysis, older age (OR 0.15, 95% CI 0.13-0.16), smoking history (OR 0.38, 95% CI 0.34-0.44), low P/F ratio (OR 0.12, 95% CI 0.11-0.14), and DCD status (OR 0.04, 95% CI 0.03-0.04) were all independently associated with significant risk aversion, corresponding to decreased rates of donor pursuit. DISCUSSION/SIGNIFICANCE OF IMPACT: OPOs differ in their levels of risk aversion in LTx and risk aversion is not uniform across selected categories of non-ideal lung donor. Consideration of new OPO performance metrics that encourage the pursuit of non-ideal lung donors is warranted.

Fear and stock price bubbles.

I evaluate Alan Greenspan’s claim that stock price bubbles build up in periods of euphoria and tend to burst due to increasing fear. Indeed, there is evidence that e.g. during a crisis, triggered by increasing fear, both qualitative and quantitative measures of risk aversion increase substantially. It is argued that fear is a potential mechanism underlying financial decisions and drives the countercyclical risk aversion. Inspired by this evidence, I construct an euphoria/fear index, which is based on an economic model of time varying risk aversion. Based on US industry returns 1959–2014, my findings suggest that (1) Greenspan is correct in that the price run-up initially occurs in periods of euphoria followed by a crash due to increasing fear; (2) on average already roughly a year before an industry is crashing, euphoria is turning into fear, while the market is still bullish; (3) there is no particular euphoria-fear-pattern for price-runs in industries that do not subsequently crash. I interpret the evidence in favor of Greenspan, who was labeled “Mr. Bubble” by the New York Times, and who was accused to be a serial bubble blower.