Risk Aversion Research Articles

Using Behavioral Insights to Strengthen Strategies for Change. Practical Applications for Quality Improvement in Healthcare.

For over 30 years, quality improvement (QI) methods have been used as a means of increasing the quality and safety of healthcare services, but with mixed success. One explanation highlighted in the literature for this outcome is the overemphasis on technical elements of change, and a failure to fully appreciate the human side of change. Behavioral insights (BI) is an approach that utilizes knowledge and tools from a broad range of scientific disciplines, such as neuroscience and behavioral psychology, to support behavior change. The aim of this paper is to explore the possibility of supplementing QI methods with tools and understanding from BI. We outline a practical case that involved applying aspects BI methods into a QI program aimed at reducing the use of intravenous antibiotics in patients accessing services at a busy university hospital in Copenhagen, Denmark. We exemplify how to use BI tools to guide the analysis of staff behaviors during standard clinical processes and develop targeted interventions aimed at increasing actions and behaviors more aligned to best clinical practice. Outcomes suggest that it is possible to combine the models and methods from BI and QI in a way that is helpful in focusing attention on the human side of change when developing strategies for change. Potential psychological barriers identified from the analysis included the following: 'default inertia,' 'decision complexity,' 'risk aversion,' and biases related to confidence, confirmation, and omission. Future quality improvement projects could benefit from integrating models and tools from BI to guide and support behavior change.

Unveiling the origins of non-performance-oriented behavior in China’s local governments: a game theory perspective on the performance-based promotion system

Performance evaluation has great potential to encourage government officials to improve their behavior (performance-oriented government behavior, POGB), but it also tends to lead to behaviors that are detrimental to government performance (non-performance-oriented government behavior, NPOGB). The latter behaviors are prevalent in many parts of the world, especially in areas with fiscal federalist characteristics such as China. This study analyzes POGB and NPOGB and employs game theory to develop a theoretical model to explain the causes of NPOGBs in China, exploring how competition among different jurisdictions leads to them. The findings show that (1) POGB is a condition of Pareto optimality in government behavior, but only represents a very small share of all government behaviors. The majority of behaviors can be categorized as NPOGBs. (2) The primary reason continuous and volatile NPOGBs persist is that, from the perspective of local officials operating under the constraints of information scarcity and risk aversion, they are rational choices, and officials have to imitate one another’s behaviors so as not to be defeated in the competition with others.

Navigating Risk Aversion and Regret

Navigating Risk Aversion and Regret

Time‐varying risk preference and equity risk premium forecasting: The role of the disposition effect

AbstractThis study examines whether the disposition effect can explain time‐varying risk preference and predict the equity risk premium. To do so, we propose an augmented general autoregressive conditional heteroskedasticity (GARCH)‐in‐Mean model unraveling the complex relationship between unrealized gains/losses, realized returns, and the equity risk premium. In our model, the risk aversion coefficient varies with the market state of unrealized gains/losses. Using data from the US stock markets, we show strong evidence that the disposition effect drives time‐varying risk preference: The risk aversion coefficient is significantly positive during periods of unrealized gains, but insignificant during periods of unrealized losses. These findings reconcile the conflicting results of the risk‐return trade‐off in existing literature. Moreover, our model shows significant predictability of the equity risk premium, both in‐sample and out‐of‐sample. Incorporating our model's predictions can yield substantial utility gains for a mean‐variance investor. Our results indicate that the disposition effect leads to time‐varying risk preference and thus induces equity risk premium predictability.

Eliciting risk preferences in an artefactual field experiment via replication and an alternative approach

AbstractThis paper investigates risk preferences using an artefactual field experiment conducted with a non-standard subject pool of farmers in Ghana. I introduce an alternative methodology for studying preferences following replication of a seminal risk elicitation procedure by Binswanger (Am J Agric Econ 62(3):395407, 1980). An important feature of both approaches is that they are easy to understand and, hence, are particularly suitable for eliciting preferences among subjects with low levels of formal education. I successfully replicate Binswanger’s study, documenting how his original result of the moderate level of risk aversion for an average farmer can be generalized to a different country. However, using my alternative approach, whereby lotteries are presented in the loss domain, I find that half of my experimental subjects violated expected utility theory. This approach is of relevance to the current literature on studying risk preferences among subjects with poor literacy skills.

Women Running for Office Are Less Risk Averse than Men: Evidence from Portugal

Women Running for Office Are Less Risk Averse than Men: Evidence from Portugal

Distributionally Robust Two-Stage Minimum Asymmetric Adjustment Cost Consensus Model with Risk Aversion

Distributionally Robust Two-Stage Minimum Asymmetric Adjustment Cost Consensus Model with Risk Aversion

The impact of information presentation on self-other risk decision-making

To explore the impact of social distance and information presentation types on self-other risk preferences in monetary tasks. Risk preferences were examined in decision-making tasks and experiential information tasks within different frameworks when participants made decisions for themselves and others. Experiment 1 employed experiential decision tasks and revealed individual differences in decision-making for oneself and others. In gain situations, participants exhibited more risk aversion when deciding for others compared to themselves. Experiment 2 presented both types of information simultaneously to investigate whether risk decisions for oneself and others are influenced by information types. Results indicated that experiential information led participants to make more conservative choices for others, while descriptive information eliminated this effect. This study discovered the influence of social distance on self-other risk decisions and the role of information presentation types in self and other risk decision-making. Future research could further explore self-other decision-making from the perspectives of decision-makers’ traits and culture.

Neural Diversity and Decisions

Abstract Purpose Differences in choices provide a window into the variety of human preferences and behaviors. Most non-trivial decisions recruit multiple regions of the brain with activity that shows substantial variation across individuals and also depends on personality traits and attitudes. Methods The present study measured nine physiologic factors and collected 15 types of psychological data while participants made decisions in standard tasks measuring risk aversion, patience, altruism, cooperation, generosity, trust, and trustworthiness. Robust predictors were defined as those that were statistically significant in both forward and backward stepwise regressions using all the collected independent variables. Results The analysis showed that multiple measures of physiologic stress decrease cooperative behaviors while testosterone consistently increased antisocial behaviors. In addition, cognitive abilities robustly increased patience but decreased cooperation, while those more satisfied with their lives were more trustworthy. Participants scoring high on the personality trait of imagination were shown to be less altruistic and generous, while neuroticism increased prosociality. Conclusion This study identified key drivers of behaviors that should be measured in decision-making experiments in order to capture the multiple factors that affect choices. We conclude with suggestions on how to establish causal relationships between the identified factors and decisions.

CEO childhood trauma experience and firm internationalization

Purpose The purpose of this study is to examine how the childhood trauma experiences of CEOs influence firms’ internationalization. Design/methodology/approach The research used a difference-in-difference method with constructing a treatment group whose chief executive officer (CEO) experienced the great famine in China between the ages of 7 and 11, and a control group whose CEO was born within three years after 1961. Findings The study reveals a significant inverse correlation between CEOs’ childhood trauma experiences and firm internationalization. However, this correlation is weaker in the case of state-owned enterprises and firms led by CEOs with overseas work experience. Originality/value To the best of the authors’ knowledge, this study is the first to extend the theoretical framework to elucidate firms’ internationalization by introducing childhood trauma theory into the field of international business literature. Second, the authors link the literature on the effect of CEO explicit traits and psychological traits on firm internationalization by exploring how CEOs’ childhood trauma experience shapes their risk aversion, which, in turn, influences firm internationalization. Third, the authors address the call for examining the interplay of CEO life experiences by scrutinizing the moderating effect of CEO overseas work experience on the association between CEOs’ childhood trauma exposure and firm internationalization.

Risk and time preferences in individuals with lifestyle-related and non-lifestyle-related cardiovascular diseases: a pilot study

ObjectivesTo (1) pilot a study of behavioural characterisation based on risk and time preferences in clinically well-characterised individuals, (2) assess the distribution of preferences in this population and (3) explore...

Heterogeneity in crowd‐out by risk aversion: Assessing the effect of the ACA Medicaid expansion

AbstractIn this study, I estimate the heterogeneity in the crowd‐out of private health insurance by risk aversion with the Medicaid expansion under the Affordable Care Act. Using data from the Health and Retirement Study, I find that the Medicaid expansion led to a decrease in private coverage among risk‐loving individuals by 5 percentage points. However, the expansion did not lead to any meaningful change in private coverage for risk‐averse individuals. This finding suggests that risk‐averse individuals are willing to keep their private coverage, even though they become eligible for Medicaid. This potentially signals a sorting effect into private insurance. Under the assumption that highly risk‐averse individuals typically display superior health conditions, this preferential behavior could signify a form of advantageous selection into private insurance. Furthermore, the expansion increased Medicaid coverage by 3.4 percentage points for risk‐loving individuals, while not causing any discernible change in coverage among risk‐averse individuals. Such differential responses could potentially influence the risk composition of Medicaid coverage, and subsequently impact the cumulative expenditure associated with it.

ALM for insurers with multiple underwriting lines and portfolio constraints: a Lagrangian duality approach

We investigate how an insurance firm can optimally allocate its assets to back up liabilities from multiple non-life business lines. The insurance risks are modeled by a multidimensional jump-diffusion process that accounts for simultaneous claims in different insurance lines with policy limits. We use Lagrangian convex duality techniques to derive optimal investment-underwriting strategies that maximize the expected utility from dividends and final wealth over a finite horizon. We examine how risk aversion, prudence, portfolio constraints, and multivariate insurance risk affect the firm’s earnings retention. We obtain explicit solutions for optimal strategies under constant relative risk aversion preferences. Finally, we illustrate our results with numerical examples and show the impact of co-integration for asset-liability management with multiple sources of insurance risk.

The influence and mechanism of female-headed households on household debt risk: empirical evidence from China

With the development of society, the number of female-headed households is on the rise. Based on the data from the China Household Finance Survey (CHFS) in 2019, this paper establishes a Tobit model to study the influence of female-headed households on household debt risk. Results indicate that female-headed households can substantially reduce household debt risk, and this conclusion still holds after overcoming endogeneity issues. Further tests on the mediating effect reveal that risk aversion and housing property holding have partial mediating effects and masking effects, respectively, in the path of female-headed households affecting household debt risk. In addition, the heterogeneity analysis indicates that the influence of female-headed households on household debt risk is more significant in third-tier cities, as well as in families without children, families without elderly members, and families with more than two elderly members. The conclusions of this paper provide a reference for the relevant policy measures to reduce household debt risk and promote gender equality.

Mind the Gap: Why Wealthy Voters Support Brexit

Abstract Wealth provides self-insurance against financial risk, reducing risk aversion. We apply this insurance mechanism to electoral behaviour, arguing that a voter who desires a change to the status quo and who is wealthy is more likely to vote for change than a voter who lacks the same self-insurance. We apply this argument to the case of Brexit in the UK, which has been widely characterized as a vote by the ‘economically left-behind’. Our results show that individuals who lacked wealth are less likely to support leaving the EU, explaining why so many Brexit voters were wealthy, in terms of their property wealth. We corroborate our theory using two panel surveys, accounting for unobserved individual-level heterogeneity, and by using a survey experiment. The findings have implications for the potential broader role of wealth-as-insurance in electoral behaviour and for understanding the Brexit case.

Cry wolf and it appears: debt ceiling debates and new corporate bond issues

We provide evidence that attention to debt ceiling debates affects the pricing of new corporate bond issues. Measuring public attention by using data from the Google Search Volume Index with the keyword “debt ceiling,” we find an increase in bond yields for non-investment grade short maturity issues at times of high attention. Further analysis suggests that the results are likely not due to changes in uncertainty or risk aversion, rather, to attention spillover to lower quality firm's short-term financing needs.

Interplay between the agriculture firm’s guarantee strategy and the e-commerce platform’s loan strategy with risk averse farmers

Many agricultural firms procure products from smallholders and sell them on platforms by paying a proportional fee. Generally, smallholders lack capital for production, and e-commerce platforms can provide loans to them. However, smallholders are risk averse, leading them to make conservative production decisions. Additionally, smallholders face bankruptcy risk due to output uncertainty and the interest burden of platforms’ loans. These factors further adversely affect smallholders’ conservative decisions. To alleviate this situation, the firm can provide loan guarantees for smallholders. This study considers a supply chain consisting of risk-averse farmers, an agricultural firm, and an e-commerce platform. The firm first decides the number of farmers to provide guarantees, and then the platform sets loan interest rates for guaranteed and non-guaranteed farmers. Thereafter, the firm decides purchase prices, and each farmer decides his production input. Given the number of guaranteed farmers, we find that the platform will charge each farmer a positive loan interest if the proportional fee is small, but it will offer interest-free (non-negative) loans to guaranteed (non-guaranteed) farmers if the proportional fee is large. Additionally, with the increase in guaranteed farmers, the firm’s profit and the farmers’ utilities are not necessarily monotonic. We further show that guaranteeing a portion of farmers is always detrimental to the firm but may be better for all the farmers. Therefore, it is better for the firm to provide a guarantee to all farmers or just offer no guarantee to any farmer, depending on the magnitudes of proportional fees and the production input efficiency.

Confidence and Outcome Expectations in Bilateral Negotiations–A Dynamic Model

AbstractThis work proposes and studies a dynamic model of two bargaining parties exchanging offers over time, considering their confidence about the share of the “pie” they obtain, which translates into expectations regarding the outcome of the bargaining process. The model predicts the sequence of offers as well as the final agreement for given confidence parameters. A mathematical analysis of the model shows the outcome is an Asymmetric Nash Bargaining Solution with exponents determined by the bargainers’ confidence. Moreover, a compensation effect can be found between confidence and risk aversion. This work also considers that confidence levels of bargainers might change during the negotiation, and we conduct a comprehensive simulation study to analyze the effect of such changes. Through Monte-Carlo simulation, we show that a bargainer is better off if its confidence increases, but the advantage is lost if the other party’s confidence increases in a similar way. In that case, concessions are smaller and negotiations last longer. Changing confidence parameters make the outcome harder to predict, as it will depend more on the final confidence than the initial one. The simulations also show that the average size of concessions, and therefore the final agreement, depend not only on whether confidence increases or decreases, but also on the change rate, with stronger effects observed when change accelerates towards the end of the process.

Does religious atmosphere affect enterprise digital transformation? Evidence from China

This study examines whether and how religious atmosphere affects enterprise digital transformation. We find religious atmosphere is significantly negatively associated with digital transformation. We also find religion inhibits digital transformation through strengthening risk aversion and weakening innovation consciousness. Additional results show that the effect of religion on enterprise digital transformation is significant primarily in firms with fewer senior executives affiliated with the CPC and managers who possess less conservative personalities. The inhibiting effect is more pronounced for non-state-owned firms and firms with lower institutional ownership. Moreover, the significant effect only exists in areas with lower market competition and weaker government intervention. Moreover, indigenous religious tradition attenuates the positive impact of digital transformation on firm productivity. Overall, our findings provide insights for understanding the role of religion, as an informal institution, in firms’ decision-making in emerging markets.

Distributionally robust disaster relief planning under the Wasserstein set

We study a two-stage natural disaster management problem modeled as a stochastic program, where the first stage consists of a facility location problem, deciding where to open facilities and pre-allocate resources such as medical and food kits, and the second stage is a fixed-charge transportation problem, routing resources to affected areas after observing a disaster. Our model has binary variables present in both stages. Due to the lack of data, classical stochastic programming approaches may be ill-suited, and we propose a two-stage distributionally robust formulation with a Wasserstein ambiguity set, where we consider distributions consistent with historical data and a tunable parameter to control the level of risk aversion. We develop a tailored column-and-constraint generation (CCG) algorithm to solve an extensive reformulation, where scenarios are iteratively generated. We handle the presence of binary variables in the second stage by leveraging the structure of our support set and second-stage problem, and provide conditions under which the optimal value of the latter is concave with respect to the intensity of the disaster, leading to an efficient scenario generation procedure. We also show that our results extend to the case where the second stage is a fixed-charge network flow problem. We perform extensive computational experiments demonstrating the computational advantage of our method over classical CCG implementations on synthetic instances, and illustrate the benefits of our approach on a popular case study from the literature of hurricane threats on the Gulf of Mexico in the United States.