Aversion Model Research Articles

The Effect of Disappointment Aversion on Risk Prevention

ABSTRACTWe adopt three of well‐established models of disappointment aversion to study the effect of disappointment aversion on risk prevention which involves self‐insurance and self‐protection. In self‐insurance actions, we show that, in general, the disappointment‐averse decision maker will exert more effort than the standard risk‐averse decision maker, and the optimal efforts across these disappointment models are not identical. Moreover, under the Gul model, the disappointment‐averse decision maker may exert less effort than the standard risk‐averse decision maker in multiple loss states. In self‐protection actions, we provide a set of sufficient conditions under which the disappointment‐averse decision maker will exert more effort or less effort compared with the standard risk‐averse decision maker for each of these disappointment aversion models.

Insights into Autonomous Vehicles Aversion: Unveiling the Ripple Effect of Negative Media on Perceived Risk, Anxiety, and Negative WOM

This study delves into the reluctance to adopt autonomous vehicles (AVs), treating AV aversion as a multifaceted psychological and behavioral phenomenon encompassing cognitive judgments, affective responses, and behavioral intentions. Leveraging the environment-product-human-behavior framework, an AV aversion model (AAM) is developed to explore human-AV interaction. Survey data from MTurk in the U.S. reveals significant differences in perception between fully autonomous vehicles (FAVs) and partially autonomous vehicles (PAVs). Findings show that negative media exposure influences perceived risk, anxiety, and negative word-of-mouth (WOM) intention. Perceived risk contributes to anxiety, while the combination of anxiety and negative media encourages negative WOM intention. The study elucidates a cascading effect from negative media to risk perception, then to AV anxiety, culminating in negative WOM. Multi-group analysis highlights a significant disparity between FAVs and PAVs in the link between negative media exposure and negative WOM intention. Understanding AV aversion offers valuable insights to address human-AV interaction.

Impact of organizational structure and in-organization resource allocation on trust and trustworthiness

We experimentally investigated how different organizational structures (horizontal, vertical) and in-organization resource allocation methods (equal, unequal) impact individuals’ trust-related behavior using a two-stage, three-player trust game. As factors influencing trust or trustworthiness, we focused on influential and resource-based power shaped by organizational structures and resource allocation methods, respectively. We expanded the inequity aversion model with power inequities and demonstrated that power inequities can impact individuals’ inequity aversion and therefore their trust-related behavior. In the equal resource allocation treatment, the trustees exhibited a greater probability of being trustworthy, and the trustors were more trusting in the horizontal structure treatment. Those trustees holding both power types significantly encouraged trust and trustworthiness, while influential power was more effective in increasing trustworthiness. This study makes a novel theoretical contribution by exploring the motivation factors of power inequity aversion and explaining how organizational structures and resource allocation methods impact individuals’ trust-related behavior via inequity aversion.

Randomization advice and ambiguity aversion

We design and implement lab experiments to evaluate the normative appeal of behavior arising from models of ambiguity-averse preferences. We report two main empirical findings. First, we demonstrate that behavior reflects an incomplete understanding of the problem, providing evidence that subjects do not act on the basis of preferences alone. Second, additional clarification of the decision making environment pushes subjects’ choices in the direction of ambiguity aversion models, regardless of whether or not the choices are also consistent with subjective expected utility, supporting the position that subjects find such behavior normatively appealing.

Environmental-Impact-Based Multi-Agent Reinforcement Learning

To promote cooperation and strengthen the individual impact on the collective outcome in social dilemmas, we propose the Environmental-impact Multi-Agent Reinforcement Learning (EMuReL) method where each agent estimates the “environmental impact” of every other agent, that is, the difference in the current environment state compared to the hypothetical environment in the absence of that other agent. Inspired by the inequity aversion model, the agent then compares its own reward with that of its fellows multiplied by their environmental impacts. If its reward exceeds the scaled reward of one of its fellows, the agent takes “social responsibility” toward that fellow by reducing its own reward. Therefore, the less influential an agent is in reaching the current state, the more social responsibility is taken by other agents. Experiments in the Cleanup (resp. Harvest) test environment demonstrated that agents trained based on EMuReL learned to cooperate more effectively and obtained 54% (39%) and 20% (44%) more total rewards while preserving the same cooperation levels compared to when they were trained based on the two state-of-the-art reward reshaping methods: inequity aversion and social influence.

Investment Portfolio Optimization in Renewable Energy Stocks in Indonesia Using Mean-Variance Risk Aversion Model

Climate change is a phenomenon that has been occurring for quite some time. However, the increasingly felt impacts of climate change necessitate human action to mitigate these effects. One way to address this issue is by transitioning from conventional or non-renewable energy sources to renewable energy. This step undoubtedly has implications for various aspects, such as investments. Naturally, investors are beginning to turn their attention to the field of renewable energy as a new target. Investments are inherently associated with risks and returns One approach to maximizing returns is through portfolio optimization. One well-known method in portfolio optimization is the Mean-Variance method, also known as the Markowitz method, as it was first introduced by Harry Markowitz. In this research, an optimal portfolio is generated with weights of 0.1470 for ADRO; 0.1939 for MEDC; 0.2143 for ITMG and 0.4449 for RAJA. With this composition of optimal portfolio weights, the expected return is obtained at 0.002252, and the return variance is 0.000496.

Adaptive preferences: An evolutionary model of non-expected utility and ambiguity aversion

We enrich an evolutionary model with common and idiosyncratic uncertainty as in Robson (1996) by allowing for hidden actions (or phenotypic flexibility). In contexts where common uncertainty is ambiguous and idiosyncratic uncertainty is risky, the model generates both ambiguity aversion and non-expected-utility preferences for risk, thereby providing a link between the two types of behavior. While the general evolutionarily optimal objective function does not have an obvious similarity to functional forms studied in the literature, our main results show that it can be recast as a combination of familiar models of ambiguity aversion and non-expected utility. We show that particular classes of hidden actions generate the special cases of rank-dependent or divergence risk preferences embedded within a model of ambiguity aversion.

Investigating in-vitro functionality and in-vivo taste assessment of eco-friendly Tadalafil Pastilles

Tadalafil (TDL) has poor bioavailability due to the less aqueous solubility and bitter taste. Oral solid dosage forms, especially tablets, have a broad market worldwide. Constraints of tablets are a long process, pollution, high processing cost, and requiring more excipient. The research was performed to optimize an eco-friendly immediate-acting pastille of TDL to put forward an alternate formulation to a tablet using advanced data mining tools. Another objective is to assess the taste masking of TDL using the Brief Access Taste Aversion (BATA) model. The amount of PEG-4000, Polyox N-10, and Kyron T-314 were chosen as critical material attributes from failure mode effect analysis. Box-Behnken design (BBD) was utilized to optimize the pastilles and ascertained the significant impact of chosen variables on disintegration time and % CDR at 10 min. The control strategy and optimal region were located using an overlay plot. The pastilles were able to release the drug within 15 min due to faster disintegration. The formulated pastilles were of uniform size, shape, and mechanical strength. The bitter taste of TDL was masked and confirmed by the BATA model. The newer formulation may be helpful in the industry due to its eco-friendly, single-step, and economical process. It unlocks a new direction in the field of oral solid dosage form as an alternative to tablets.

Addressing insurance price discrimination in an era of diversity, equity, and inclusion

AbstractThe early 2020s diversity, equity, and inclusion movement has prompted debate about banning the use of suspect insurance pricing variables because they discriminate against protected classes, such as gender. This paper demonstrates how banning an insurance pricing variable currently used in insurance pricing models can result in regulatory adverse selection if the ban heterogeneously combines policyowners with different expected losses into the same risk class, contrary to risk‐based pricing. The paper begins by describing several recent regulatory and judicial decisions to ban insurance pricing variables. It next describes the process used by insurers to set insurance prices, followed by a discussion of applicable insurance discrimination laws. Using a simple risk aversion model, the paper next examines whether a ban on gender‐based auto insurance pricing in California in 2019 results in regulatory adverse selection. The paper concludes by describing possible alternative pricing variables available to auto insurers if gender‐based pricing is banned.

Do People Care about Others’ Benefits from Public Goods? An Investigation Based on Inequity Aversion Model

Do People Care about Others’ Benefits from Public Goods? An Investigation Based on Inequity Aversion Model

A general equilibrium model of dynamic loss aversion

A multi-self model of dynamic loss aversion is developed to explore consumption dynamics in a calibrated general equilibrium for consumers whose utility depends on gain-loss feelings relative to their reference expectations. The model is versatile enough not only to fit the consumption data without resorting to any other mechanism than the preference, but also to reconcile consumption smoothing motivation with the nonmonotonic lifecycle consumption in data. This paper demonstrates that the key mechanism of the flexibility comes from the dual value function for gains and losses, which makes the nonmonotonic profile feasible, as well as the model’s descriptive property by which any plan of non-standard consumption behaviors is incorporated into the optimization procedure. Moreover, using a modified model in which the reference dependent consumers are restricted in their ability to foresee their future income flow, this paper provides an insight into loss aversion over a lifecycle implied from the income flow. When the model is extended to an environment under uncertainty, wherein the key mechanisms are well preserved, a negative saving is observed for a small income uncertainty, implying the precautionary-saving motive is compromised by overconsumption intention.

Preferences over taxation of high-income individuals: Evidence from a survey experiment

The mobility of high-income individuals across borders puts pressure on governments to lower taxes. A central tenet of the corresponding textbook argument is that mobile individuals react to tax differentials through migration and immobile individuals vote for lower taxes. We investigate to which extent this argument is complete. In particular, political ideology may influence voting on taxes. We vary mobility and foreign taxes in a survey experiment within the German Internet Panel (GIP), with more than 3000 individuals participating. We find that while the treatment effects qualitatively confirm model predictions of how voters take the mobility of high-income earners into account when choosing domestic taxes, ideology matters: left-leaning high-income individuals choose higher taxes and emigrate less frequently than right-leaning ones. These findings are in line with the comparative-static predictions of a simple model of inequality aversion when the aversion parameters vary with ideology.

Choquet operators and belief functions

This paper investigates characterizations of a class of belief functions. Our main contributions are threefold. First, using the notion of invariant weights, we characterize the Choquet operator with respect to belief functions along the lines of Schmeidler [26]. Second, we directly derive a class of belief functions on a state space and a collection of events that determines whether the Möbius inversion is strictly positive or zero. Third, we show that the derived collection is simple-complete. Our characterization results yield a wide variety of applications to economics, a multiperiod decision model, an inequality aversion model, and Leontief preferences.

Demand Volatility and Firm Export Margins: Evidence from Egypt

The study explains the export behavior of Egyptian firms under demand volatility in destination countries using detailed customs data and high-dimensional fixed effects. It finds that demand volatility negatively affects both the intensive and extensive export margins. The effects are particularly evident for large firms which reduce their export sales — especially over time — to more volatile destinations/products, are more likely to exit from exporting more volatile products and are less (more) likely to enter (exit) more volatile destinations. These findings confirm recent literature that emphasizes the greater elasticity of large firms to foreign demand shocks. They are also in line with risk aversion models in which the average risk premium increases with firm size. Given the disproportionate adverse impacts on large exporters, we find that higher demand volatility leads to lower aggregate exports, especially to geographically close and low trade costs countries. Accordingly, uncertainty in demand lessens the positive effect of lower trade barriers on exports.

Estimating social preferences using stated satisfaction: Novel support for inequity aversion

Experimental identification of social preferences often uses a revealed-preference approach, whereby participants make choices over payment distributions for themselves and others. We introduce an alternative “stated satisfaction” approach: participants directly report their satisfaction with various payment-profiles that hold their own payment constant while varying another participant's payment. We then use our data to estimate the unrestricted parameters of the Fehr and Schmidt (1999) model to determine participants’ social preferences. While the Fehr and Schmidt parameter-assumptions make it a model of inequity aversion, alternate parameter-assumptions can reflect different social preferences. Our methodology yields support for the Fehr and Schmidt assumptions (i.e., that both disadvantageous and advantageous inequity are utility-diminishing, the former more so than the latter) at both the aggregate and individual levels. Methodologically, eliciting satisfaction can be an easy-to-implement complement to choice-based preference-measures in contexts other than social preferences that are of interest to economists.

Are upper-secondary track decisions risky? Evidence from Sweden on the assumptions of risk-aversion models

Relative risk aversion (RRA) models explain social class inequalities in education with risk avoidance, i.e., the risky choice assumption (RCA). This assumption concerns risks related to more ambitious educational choices and has been subject to little explicit scrutiny. In this paper, we test whether or not vocational education is a safety net that protects from labor market marginalization. We present an empirical assessment of upper-secondary track choices in Sweden, contrasting the vocational and the academic tracks for those not pursuing tertiary educational degrees. We use Swedish administrative data for all siblings born 1972–1980 and fit sibling fixed effects models netting out unobserved time-constant confounders. The only evidence in favor of the RCA is that when considering selection, graduates of the academic track without a tertiary degree initially face higher risks of not being stably employed and registered as unemployed in their early 20s than their counterparts from vocational education. However, the academic tracks significantly protect men from the threat of entering unskilled routine occupations. We conclude that the support for the RCA is scant at best.

A controversy about modeling practices: the case of inequity aversion

ABSTRACT This paper studies the controversy on Fehr and Schmidt's model of inequity aversion. It borrows insights from disciplines such as philosophy and the sociology of science that have specialized in studying scientific controversies. Our goal is to contribute to the historical and methodological literature on behavioral economics, which happens to have neglected behavioral economists' research on social preferences. Our analysis of the controversy reveals some new insights about the relation of behavioral economics with other sub-fields in economics, as well as with other disciplines.

Understanding guilt-related interpersonal dysfunction in obsessive-compulsive personality disorder through computational modeling of two social interaction tasks.

Obsessive-compulsive personality disorder (OCPD) is a high-prevalence personality disorder characterized by subtle but stable interpersonal dysfunction. There have been only limited studies addressing the behavioral patterns and cognitive features of OCPD in interpersonal contexts. The purpose of this study was to investigate how behaviors differ between OCPD individuals and healthy controls (HCs) in the context of guilt-related interpersonal responses. A total of 113 participants were recruited, including 46 who were identified as having OCPD and 67 HCs. Guilt-related interpersonal responses were manipulated and measured with two social interactive tasks: the Guilt Aversion Task, to assess how anticipatory guilt motivates cooperation; and the Guilt Compensation Task, to assess how experienced guilt induces compensation behaviors. The guilt aversion model and Fehr-Schmidt inequity aversion model were adopted to analyze decision-making in the Guilt Aversion Task and the Guilt Compensation Task, respectively. Computational model-based results demonstrated that, compared with HCs, the OCPD group exhibited less guilt aversion when making cooperative decisions as well as less guilt-induced compensation after harming others. Our findings indicate that individuals with OCPD tend to be less affected by guilt than HCs. These impairments in guilt-related responses may prevent adjustments in behaviors toward compliance with social norms and thus result in interpersonal dysfunctions.

Loss Aversion Order Strategy in Emergency Procurement during the COVID-19 Pandemic

The COVID-19 pandemic has had a serious impact on firms’ sourcing strategies. Since COVID-19 disrupted the supply chain, firms have had to make emergency purchases from other suppliers. In addition, emergency ordering is one of the most effective strategies to achieve sustainable operations because such a strategy can save inventory costs. We aim to address a retailer’s emergency procurement strategies during the COVID-19 pandemic. We use prospect theory and the newsvendor model to uncover the retailer’s inventory decisions. In our study, we find that retailers have the choice to order items before the selling period at the normal purchase price, and, if available, they can order them before the end of the selling period at the urgent purchase price. We perform a comparison of the optimal ordering policy and margins in this case with the conventional and loss aversion models. The influence of emergency procurement on the optimal order policy and margins is investigated as well. This paper contributes in theory that we innovatively capture the uncertainty of emergency sourcing, which is a feature that has never been considered in current research.

Prior perceived losses and investment objectives after stock market crisis: a moderated-mediation model of risk tolerance and loss aversion.

This study explores whether prior perceived losses affect investment objectives via loss aversion as a mediator and whether the indirect effect is moderated by risk tolerance in a moderated-mediation model. Using retail investors who witnessed a market crash in Bangladesh and experienced losses, the model is tested by employing regression analyses and conditional process. The analyses reveal that prior perceived losses indirectly affect investment objectives (earning a higher expected return and building a financial reserve for future expenses) via mediation of loss aversion. Moderated-mediation model shows that for high-risk-tolerant investors, prior perceived losses indirectly affect investors to invest more for achieving a higher expected return objective and less to achieving building a financial reserve for future expenses, via a low level of loss aversion. These suggest that risk-tolerant investors continue to invest to earn a higher expected return even though they experienced prior losses and are loss-averse. Supplementary InformationThe online version contains supplementary material available at 10.1007/s43546-022-00259-6.