Low Risk Aversion Research Articles

Mental Bandwidth is Associated with HIV and Viral Suppression Among Low-Income Women in Philadelphia.

Behavioral economics research suggests poverty may influence behavior by reducing mental bandwidth, increasing future discounting, and increasing risk aversion. It is plausible these decision-making processes are further impaired in the context of HIV or pregnancy. In this cross-sectional study of 86 low-income women in Philadelphia, HIV was associated with lower mental bandwidth (one of two measures) and lower risk aversion. Pregnancy was not associated with any decision-making factors. In secondary analyses, viral suppression was associated with greater mental bandwidth (one of two measures), and antenatal clinic attendance with lower future discounting. Anti-poverty interventions may be beneficial to improve HIV-related health behaviors.

Punishment and Reward Sensitivity in Risk-Taking as Potential Mechanisms Explaining the Relationships Between Childhood Callous-Unemotional Traits and Adolescent Substance Use in a Longitudinal Cohort Study Sample.

Childhood callous-unemotional (CU) traits are associated with a neurocognitive response style of high reward and low punishment sensitivity, which may make these children particularly vulnerable to substance misuse. However, the mechanisms explaining the link between CU traits and substance use are poorly understood. This study investigated the mediating influences of reward and punishment sensitivity on the association between childhood CU traits and adolescent substance use. Using data from the UK Millennium Cohort Study, mediation analyses were conducted to investigate the potential indirect effects of age 14 reward and punishment sensitivity in risk-taking on the relationships between age 11 CU traits and alcohol, cannabis, and other illicit drug use at age 17. No direct effects of CU traits on substance use were found when accounting for gender, baseline alcohol use, poverty, emotional symptoms, conduct problems, hyperactivity, and verbal ability at age 11. Indirect effects of increased reward sensitivity on the relationship between CU traits and increased use were seen for alcohol, cannabis, and other drugs. There was a significant indirect effect of reduced punishment sensitivity on the relationship between CU traits and increased alcohol use, but not cannabis or other substance use. Findings suggest that reward and punishment sensitivity may have independent effects on decision-making processes contributing to adolescent substance use. Prevention and early intervention for substance use should consider modifying intervention strategies to fit the needs of adolescents with a callous interpersonal style and a neurocognitive profile characterized by a high drive for rewards and low risk aversion.

Innovation in Family Businesses: A Bibliometric Analysis

Purpose –This research aims to find out the general movement and gaps in the innovation studies in family businesses by connecting them with studies in mainstream innovation literature.Design/methodology/approach –In this research, 926 documents published in 283 journals in the Web of Science database between 1997 and 2022 in the field of innovation in family businesses were analyzed. Bibliographic coupling analysis, co-citation analysis, co-word analysis, and trend analysis were carried out to evaluate the intellectual and conceptual structure of the field. Trends in the relevant literature were visually mapped by identifying journals, authors, research topics, and connections between them.Findings –According to the results of the intellectual structure analysis, family participation, family culture, family ownership, and socio-economic wealth issues come to the fore. Co-citation analysis findings indicate that the concepts of performance and sustainability, which have a strong relationship with entrepreneurship, will be among the important research topics in the near future.Discussion –The desire of family businesses to protect their assets causes them to avoid long-term risky innovation projects and their innovation speed to decrease. Family businesses tend to rely on external sources of knowledge and technology, focusing on incrementalrather than radical innovation. This tendency stems from the typical organizational climate of low formality and risk aversion in determining strategic choices and functional organizational structures with high decision-making autonomy. Intergenerational innovation should be focused on to create innovation competencies in future generations.

Unraveling Investor Behavior: The Role of Hyperbolic Discounting in Panic Selling Behavior on the Global COVID-19 Financial Crisis.

In financial markets, irrational behaviors such as hyperbolic discounting and panic selling are prevalent. However, their widespread empirical associations remain unexplored. Numerous behavioral theories discuss how cognitive biases exacerbate panic selling through the lens of immediate loss aversion, a phenomenon in which individuals exhibit impulsive decision-making tendencies due to an intense fear of financial loss during market upheaval. Despite the theoretical elucidation, empirical investigations of these dynamics are lacking. Using a robust dataset comprising 121,293 active investors sourced from a collaborative effort between Hiroshima University and Rakuten Securities Inc., this study used mean comparison tests and probit regression to analyze hyperbolic discounting's role in panic selling behavior on the global COVID-19 financial crisis. The findings reveal that hyperbolic discounting plays a central role in triggering investors' impulsive panic selling behavior, which is driven primarily by fear of potential losses. Other factors that influence panic selling behavior include age, male gender, low education level, financial literacy, household income, household assets, risk aversion, and overconfidence in financial knowledge. Our study explicates the need to address cognitive biases in financial decision making during market crises through strategies such as targeted financial education, regulatory interventions against market manipulation, and the provision of professional advice to investors.

Replicating business cycles and asset returns with sentiment and low risk aversion

I solve for the sequences of shocks (or wedges) that allow a standard real business cycle model to exactly replicate the quarterly time paths of U.S. macroeconomic variables and asset returns since 1960. The resulting shock sequences can be grouped into three main categories: (1) shocks that affect household sentiment and preferences, (2) shocks that appear in the law of motion for capital, and (3) shocks that appear in the production function for output. For most variables including output, no single shock category is clearly dominant in explaining the observed movements in U.S. data. While some variables are driven by a single dominant shock category, the dominant category is different for each of those variables. The results imply that there is no “most important shock.” Rather, U.S. economic outcomes have been shaped by a complex and time-varying mixture of fundamental and non-fundamental disturbances.

Behavioral preferences and contract choice in the residential solar PV market

AbstractGreater adoption of renewable energy technologies by households is a key component of decarbonization and energy transition goals. Although existing literature has examined how sociodemographic characteristics, “green” preferences, and peer effects impact adoption of new energy technology, the role of behavioral preferences has not been adequately studied. In this paper, we examine the effect of two types of behavioral preferences, namely the degree of risk tolerance (risk preference) and attitude toward delayed reward (time preference) on the contract decision to lease or own a solar photovoltaic (PV) system. We develop a theoretical framework to show that the effect of risk and time preferences on the relative utilities from the two contracts is monotonic: Lower risk aversion and lower discount rate (more patience) imply a higher chance of solar PV ownership. To test these predictions empirically, we first estimate preference parameters (risk aversion and discount rate) from laboratory data collected from solar PV adopters. We then combine the parameter estimates with data on actual solar PV contract choice to examine the relationship between solar PV adopters' time and risk preferences and their lease‐versus‐own choice. Our regression results confirm that less risk averse individuals have a higher tendency to choose the ownership option, whereas more patient individuals are (weakly) more likely to own their solar PV systems. These findings contribute to a greater understanding of the role of behavioral factors in household decisions related to energy technologies.

Digital technology adoption strategies for a contract farming supply chain under CVaR criterion

AbstractThis study considers a contract farming supply chain consisting of a platform and a risk‐averse farmer with yield uncertainty. It establishes game theory models with and without digital technology under CVaR criterion and analyzes three digital cooperation mechanisms. We find that when the wholesale price is moderate, both parties will choose a cost‐sharing contract; when the wholesale price is high, both parties will choose to let the farmer bear the cost of digital investment; when the farmer uses digital technology to grow agricultural products, the platform should not provide the farmer with a low wholesale price, especially for the farmer with low risk aversion.

Blockchain Adoption for Generic Drugs in the Medicine Supply Chain with Consumers' Risk-Aversion: A Game-Theoretic Model Within Chinese Legal Framework.

Blockchain is expected to mitigate consumers' risk-aversion and quality uncertainty about generic drugs in medicine supply chains. This study investigates the effect of blockchain adoption for disclosing the quality information of generic drugs that compete with original drugs in the market and proposes legal measures accordingly. We employ a game-theoretic model to analyze a medicine supply chain including a generic drug manufacturer, an original drug manufacturer, and a retailer. We examine when should the supply chain members adopt blockchain for generic drugs and how blockchain affects the medicine supply chain. Our results show that the quality information of generic drugs determines how blockchain adoption affects the price and sales quantity of generic and original drugs. Moreover, we observe that the generic drugs manufacturer and the retailer decide to adopt blockchain only if consumers' risk-aversion degree is sufficiently low. Also, a low risk-aversion degree can lead to higher whole supply chain's profitability with blockchain adoption, and generate a win-win-win situation of blockchain adoption for the consumers, the generic drug manufacturer, and the retailer. To mitigate consumers' risk aversion, the law should safeguard consumer rights. Blockchain adoption can benefit the medicine supply chain and consumers under certain conditions. However, it also requires the coordination of supply chain members' benefits and the disclosure of quality information.

Durable goods and consumer behavior with liquidity constraints

AbstractThis paper presents an integrated model of intratemporal demand and intertemporal consumption, with allowance for durable goods and liquidity constraints. Demand equations for non‐durable and durable goods with the user cost of durable goods are jointly estimated with a consumption Euler equation incorporating liquidity constraints for Norwegian consumers from 1978 to 2018. Results show that demand analyses ignoring durable goods lead to a significant bias in the elasticities of non‐durable goods. Norwegian consumers are found to be impatient, with low risk aversion. There is weak evidence for liquidity constraints in consumption. No strong evidence exists for intertemporal substitution in consumption, but a considerable effect of uncertainty is found in durable consumption.

Chronic Stress, Hair Cortisol, and Risky Decision-Making Processes in Young Adults

Components of risky decision making, such as risk perception, risk aversion, and risk taking may be impacted by chronic stress. Research suggests college students report higher chronic stress than non-student peers, however, it is unclear how the chronic stress of the pandemic may have differentially impacted these groups. Predicting risky decision making requires a nuanced understanding of how the experience and physiology of chronic stress impact choice cognitions. We assessed chronic stress, risk perception, risk aversion, and risk taking in 18-25 year old university students (N = 141) and age-matched non-student peers (N = 142). A subsample of university students (N = 57) provided hair samples to measure cortisol concentrations. We administered self-report chronic stress scales, the Domain Specific Risk Taking scale to assess risk cognitions, and the Balloon Analogue Risk Task to assess risk-taking. Contrary to previous research, non-students reported greater chronic stress and exhibited lower risk taking behavior compared to college students. Regardless of student status, higher self-reported chronic stress correlated with greater risk perception and lower risk aversion. Hair cortisol concentration was not related to either risk cognitions or risky behavior. Chronic stress influences decision making cognitions among young adults. The non-student sample reported more stress than university students, perhaps due to the economic and societal upheaval during the pandemic. Hair cortisol concentration was unrelated to chronic stress or decision making. Cortisol levels are influenced by many factors beyond chronic stress; it’s dysregulation may be reflected in both hyper- and hypo-reactivity.

The predictability of skewness risk premium on stock returns: Evidence from Chinese market

Skewness risk premium is the difference between realized skewness and implied skewness. This paper provides empirical evidence of the predictive power of skewness risk premium for the stock returns both from cross-sectional and time series. We find that the skewness risk premium exists in the Chinese market and is positively correlated with future index excess returns, as evidenced by both in-sample and out-of-sample analyses. From a cross-sectional perspective, we find stocks with high exposure to the skewness risk premium yield higher average excess returns. When controlling for common risk factors, the forecasting power of the skewness risk premium remains robust. In addition, this paper also examines the impact of investor sentiment and risk aversion on the predictability of skewness risk premium. We find the risk-return relation is weaker during high investor sentiment and low risk aversion.

Do Religious Politicians Take Risks Differently? Evidence From Pakistan

AbstractGiven popular religiosity, the presence of religious parties, and the politicization of religious issues, it is highly likely that politicians with varying levels of personal religiosity are active in politics. Yet, our knowledge of how politicians’ religiosity influences their political choices is still limited, particularly for developing countries. In this paper, I use data from a survey experiment fielded to Pakistani politicians in 2018 to study whether and how politicians’ personal religiosity influences their political risk preferences. Scholars debate whether religiosity is correlated with higher or lower risk aversion among citizens; however, no study has examined this relationship among politicians. I find that higher religiosity systematically predicts which politicians are more risk‐averse and highly religious politicians’ decisions under uncertainty are inconsistent with expected utility maximization and prospect theory. These findings suggest that in contrast to existing assumptions of elite decision‐making, politicians’ religiosity systematically influences their risk preferences and choices.

Robust consumption for individuals with pessimistic survival beliefs

As some literature reveal, young people generally keeps pessimistic survival beliefs, and individuals usually make decisions based on their expectations instead of the experience data. Motivated by this idea, we study the optimal consumption problem for individuals with ambiguity aversion about their mortality. Closed-form robust consumption policy before retirement is obtained by solving the HJB equation by employing the dynamic programming principle. The result tells us that pessimistic survival beliefs, together with interest rate, risk attitude, and expectations for the retirement, play an important role on the consumption and saving decision-making. Reducing interest rates can promote consumption, but the impact is not significant. Both mortality and risk aversion level have significant impacts on the consumption. Too much pessimistic survival beliefs or too much low risk aversion level would lead to overconsumption.

Effect of risk aversion on supply chain performance and energy contracting design with financial asymmetry

AbstractEnergy performance contracting is a contractual arrangement between clients and energy service companies. At present, it is a key tool to implement energy efficiency measures in the existing supply chain management. In this paper, we study the efficiency of the energy performance contracting in a supply chain including one risk‐averse supplier and two risk‐neutral manufacturers with financial asymmetry. The manufacturer with weak finance has no funds to order enough raw materials; thus, the supplier offers a trade credit financing to ensure her normal operation and participate in the competition with the financially strong manufacturer in the market. However, neither manufacturer has extra capitals to develop emission reduction activities. Therefore, the upstream supplier acts as an energy service company and provides an energy performance contracting for two downstream manufacturers to reduce carbon taxes. We analyze important factors such as risk aversion coefficient, carbon tax saving sharing ratio, and variable cost coefficient to explore whether and which manufacturer the supplier should select to provide an energy performance contracting. The results show that, when the risk aversion is high, the supplier will not provide energy‐saving services for any manufacturer. When the risk aversion and the variable cost are low, the supplier tends to offer an energy performance contracting for the manufacturer with weak finance, because the supplier can get more utility from higher wholesale price. However, with the increase of costs, the supplier with a low risk aversion is more willing to provide emission reduction services for the financially strong manufacturer. Furthermore, sensitivity analysis demonstrates that there is always a Pareto region to optimize the utility of supplier and manufacturers, when the supplier provides energy performance contracting for both manufacturers.

Supply Chain Performance with a Downside-Risk-Averse Retailer and Strategic Customers

Predicting future promotion information on markdowns, customers can maximize their utilities by deciding when to buy. With this strategic behavior, this paper investigates a downside-risk-averse retailer’s integrated stock and pricing problem using a single case study method. Analyzing effects of the downside risk aversion and strategic customers is our purpose. By exploring a two-phase newsvendor model with a retailer selling to strategic customers, our work determines the downside-risk-averse retailer’s equilibrium ordering level and selling price. On this basis, effects of the downside risk aversion and the strategic behavior on the retailer’s optimum decisions and profit are analyzed. We find that the reverse effect of the strategic behavior can be mitigated by the retailer’s downside risk constraint. We also extend the model to a decentralized supply chain case. It is found that a low (high) downside risk aversion would mean that the supply chain profit in the decentralized case can (cannot) dominate the centralized under some (any) wholesale price contracts when customers are strategic. In addition, for different risk aversions, we also construct contracts to optimize the supply chain profit. Our results will provide reference evidence of making operational management decisions for the downside-risk-averse retailer in the case of strategic customers.

Risk Aversion and Perception of Farmers about Endogenous Risks: An Empirical Study for Maize Producers in Awi Zone, Amhara Region of Ethiopia

Agriculture is a risky business that is subject to endogenous risks. Endogenous risks caused by input utilization, input affordability and input availability may prove detrimental to the production potential of farmers. The study was aimed at examining the risk perception, risk aversion and risk management strategies of maize producers in Awi zone, which is found in the northwest part of Ethiopia. The study involved 343 respondents who produced maize under risk. Descriptive statistics, a seven-point Likert scale, the observed economic behaviour method, factor analysis and a seemingly unrelated regression model were used to process the data. The results showed that farmers have different perceptions of the endogenous risk associated with input availability and input affordability which has a different probability of occurrence and severity of damage. The observed economic behaviour method showed that farmers in the area also have different risk aversion behaviours: about 7.29% of the respondents in the study area have high risk aversion attitudes, while about 30.61% have medium risk aversion attitudes and 62.10% of them have low risk aversion attitudes. The seemingly unrelated regression model output showed that farmers’ economic, social, demographic and institutional factors, as well as their risk behaviour, determine the risk management strategies that they employ. Maize farmers in the area applied human risk management strategies, production risk management strategies, diversification, financial risk management strategies and marketing risk management strategies to tackle the endogenous risks in the area. It was deduced that maize farmers have a risk averse behaviour even if their risk aversion levels differ based on the scope of the management strategies that they employ to combat risk. Following the finding of the study, a holistic approach to risk management that encompasses all actors, such as farmers, researchers, extension services and financial institutions should be involved to make the appropriate interventions.

A comparison of banks and real estate intermediaries as house sellers

The foreclosure crisis associated with the banking crisis transformed banks in the hardest-hit countries into real estate brokers. The main novelty of this paper is to study banks as sellers of their own foreclosed properties and compare banks’ sales outcomes with those of traditional agents in the real estate market. We compare the list price, selling price, time on market and price discount of traditional real estate companies (TRECs) and bank-owned real estate companies (BRECs). We find evidence of a higher selling price, higher list price and longer time on market (TOM) for BRECs than for TRECs. Our findings are consistent with BRECs displaying greater patience as well as lower risk aversion. However, these explanations are not enough to fully account for the magnitudes of the coefficients. The empirical estimates suggest that information in the housing market may also be a source of distortions. In fact, the main aim of the sale varies depending on the incentives of the company. BREC sellers are banks that own the properties for sale, so their incentives are to maximize selling prices to reduce the loss charged to their annual results, while TRECs seek to minimize the TOM.

Anticipate, wait or don't invest? The strategic net present value approach to study expansion decisions under policy uncertainty

AbstractDutch dairy farmers used different investment strategies in their production capacity in the periods around the abolishment of the European Union milk quota. Some farmers anticipated and expanded their production, others waited till expected policies were implemented or did not change their production. We develop a theoretical framework that integrates investment strategies—anticipating, waiting, or not investing—in the presence of policy uncertainty. We provide a numerical illustration of the framework to a typical Dutch dairy farm considering to expand the milk production. Results show that farmers would anticipate when they expect that the right system will be implemented with delay and will have low financial consequences. A low risk aversion reinforces the adoption of the anticipation strategy. The implications for policy and practice are discussed [EconLit Citatons: D22, Q00, Q18].

Consumption with earnings, liquidity, and market based models

The market, earnings, and liquidity growth combine to form a proxy for wealth growth, allowing a recursive consumption model with a low risk aversion coefficient, a risk-free rate close to historical, a high equity premium, and a reasonable elasticity of intertemporal substitution. The empirical consumption model does well against major asset pricing puzzles. Tested over 118 years it is not rejected while a forward-looking consumption model using the market alone as a wealth proxy fails. Changing liquidity and earnings forecast consumption and their ‘crashes’ precede consumption declines. We also demonstrate related stock level factors have similar economic magnitude and are significant. These models are consistent to the financial intermediary economic growth literature. Such consistency across approaches adds credence to common earnings and liquidity factors as important risks to investors.

Revisiting the pricing benchmarks for Asian LNG — An equilibrium analysis

This study investigates if the Japan-Korea-Marker (JKM) price is a feasible benchmark to replace the oil indexation in Asian liquified natural gas (LNG) trade. For this purpose, we propose an equilibrium pricing model for the LNG long-term contract (LTC) in Asia. Our model incorporates the risk-averse importer and exporter who optimize their risk-profit tradeoffs by deciding their LTC-spot trade portfolios. Using the model, we compare the pricing efficiency and the risk-profit tradeoff of an importer/exporter under different benchmarks (oil price versus JKM price). The results show that the JKM price is more efficient as an LTC pricing benchmark than the oil price. The JKM pricing benchmark is favored for both exporters and importers when they are low risk-aversion. In addition, we compare the performance of the JKM benchmark based on the CIF price term (i.e., the importer pays for freight charges) with that based on the FOB price term (i.e., the exporter pays for freight charges). We find that the freight liability has little effect on the pricing efficiency of the JKM benchmark.