Risk Aversion Research Articles

Earthquakes and Intertemporal Preferences: A Field Study in Italy

Abstract In this paper, we report data drawn from a field study in an Italian region (Campania), where a disastrous earthquake took place in 1980. We rely on subjects’ responses to a questionnaire and on experimental measures. We compare the time preferences in two different samples, the first one constituted by subjects who directly experienced the earthquake and its aftermath effects, and the second one constituted by subjects who lived far away from the earthquake epicentre, but in urban areas with comparable socioeconomic features. Our aim is to test whether there are long run effects of environmental disasters on time preferences. We find significant differences, since individuals living close to the epicentre are more patient than subjects in the alternative sample, also controlling for risk aversion.

Market experience and agricultural technology adoption: the role of risk aversion and locus of control

Abstract This study examines the relationship between market experience and the adoption of risky but profitable agricultural technologies and explores the role of demand-side barriers. Using survey and incentivized experimental data, we find that market experience is significantly associated with increased adoption of improved agricultural technologies. Furthermore, we find that market experience is linked to reduced risk aversion and a stronger internal locus of control, which, in turn, are associated with higher technology adoption. Our findings imply that policies aimed at increasing farmers’ investment in improved agricultural technologies benefit not only from providing access to these technologies but also from addressing psychological barriers.

The distributional implications of pension benefit indexation

AbstractSocio‐economic differences in longevity have fuelled a debate on whether pension systems have a regressive bias favouring groups with a high life expectancy. We show that the distributional implications of such pooling depend critically on the benefit profile across age/time, which in turn is determined by how benefits are indexed to prices and wages. Choosing an indexation scheme involves a choice between a low initial benefit with an increasing profile and a high initial benefit with a flat/decreasing profile, where the former benefits groups with a high life expectancy, and vice versa. We analyse how indexation affects the trade‐off between insurance and distribution when groups with different mortality are separated or pooled, and the optimal benefit profile under both standard preferences and temporal risk aversion with respect to the length of life.

Risk attitudes and private disability insurance holdings

AbstractThis study identifies several factors that affect the demand for disability insurance (DI), such as wealth, health, financial literacy, and self-reported willingness to take financial risks, using a logit model and a random forest algorithm. While the role of risk aversion in insurance ownership is well established within theoretical insurance models, the empirical literature is still inconclusive. We provide evidence based on the Survey of Consumer Finances that willingness to take financial risks similar to wealth, health, and financial literacy is positively associated with the ownership of private DI. Furthermore, the literature has not explored multivariate risk attitudes in this framework. We thus employ indices of multivariate risk attitudes within a theoretical DI model. Our empirical results on private DI, in conjunction with the theoretical model we present, allow us to test hypotheses regarding multivariate household preferences and reject the hypothesis of correlation-neutral preferences on wealth and health.

Market Risk of Lithium Industry Chain—Evidence from Listed Companies

Lithium, a crucial raw material for new energy vehicles, is experiencing significant market price fluctuations due to escalating geopolitical conflicts, periodic mismatches in supply and demand, and increased attention to lithium resources from countries around the world. These factors may adversely affect the development of the new energy vehicle industry. This paper adopts the TVP-VAR-DY model, which measures dynamic spillover effects by allowing for variance changes through the estimation of a stochastic Kalman filter, thereby measuring risk spillover among upstream and downstream firms in the lithium industry chain. We selected 16 listed companies and six regional financial markets as the research sample, with the sample period from 4 July 2018, to 30 June 2023. The main conclusions are as follows: Between 2018 and 2020, the overall risk spillover in the lithium industry chain demonstrated a declining trend, though it experienced a sudden surge in 2020 as a result of the COVID-19 pandemic. This increase was followed by a gradual decline as the global economy improved and market stability was restored, leading to a reduction in risk aversion. Regarding the reception of risk spillovers, upstream firms exhibited a generally consistent level of directional risk spillovers, whereas downstream firms experienced more significant fluctuations. Chinese firms exhibited a higher level of received risk spillovers compared to their international counterparts, with less variation in these spillovers. From the perspective of risk spillover effects, significant variations were observed between firms in both the upstream and downstream markets. Chinese firms exhibited a higher level of risk inflow than international firms, with more pronounced changes in risk spillovers. Upstream enterprises should enhance their market competitiveness to mitigate the adverse effects of economic uncertainty. Downstream enterprises can alleviate the rise in raw material costs resulting from market price fluctuations through strategic cooperation. Additionally, the government should increase the market supply of resources, which will contribute to the establishment of a more robust lithium industry chain system.

Is It Worth Imitating Other Investors’ Determinants of Effective Investment Strategies Among Students

Purpose: This study examines the investment strategies of Generation Z, focusing on how they define and implement these strategies. It explores the factors influencing their decisionmaking, such as risk aversion and time horizon, and investigates the impact of social interactions on their investment choices. Design/ methodology/approach: The research involved a total of 626 participants across two academic years (218 in 2022 and 408 in 2023), who developed and executed virtual investment strategies over a seven-week period using GPWtrader, an educational platform by the Warsaw Stock Exchange Foundation. Weekly meetings were held where participants presented their strategies, market observations, and results. After the investment period, a quantitative study was conducted with 314 students from the total sample (106 in 2021/22 and 208 in 2022/23), collecting data on their investment goals, instrument selection, and strategy adaptation methods. Findings: The main finding is that any strategy turned out to bring a better return rate than a strategy that was constantly shifting. Also, different strategies were adopted and many students were imitating the strategies of their peers, suggesting that the social aspect of the investment decision-making process should not be underestimated. Research limitations/implications: The study’s main limitations are its focus on a single, homogeneous group and its sample size, which limited the use of advanced statistical analyses. The authors plan to extend the research to compare the students’ returns with market portfolio returns, analyze correlations between strategies and outcomes, and include other sub-populations of Generation Z. Originality/value: This paper extends the perspective on the investment behaviors of Generation Z, emphasizing the importance of consistency in strategy execution and the influence of social interactions. It makes a significant contribution to understanding generational differences in financial decision-making, offering practical implications for financial education and investment training.

An Assessment of Risk-Taking Behavior of Individual Investors: Role of Financial Literacy and Emotions

This paper studies the impact of emotions such as locus of control, overconfidence, risk avoidance, agreeableness, and financial literacy on risk-taking behavior. Data was collected from 338 individual investors from Delhi-NCR and analyzed through PLS-SEM 4 (V.4.0.9.2) to understand the direct and inverse association among the construct and to identify what influenced their investment choices the most. According to the data interpretation, a strong association between agreeableness and risk-taking behavior was evident; the study’s findings indicate that investors were heavily impacted by their peer group while making investment decisions. It also concludes that financial literacy induces overconfidence but does not result in risk-taking behavior. General risk aversion has a direct and locus of control has an indirect influence moderated by agreeableness on the risk-taking behavior of individual investors.

Beyond the foreign language effect: unravelling the impact of l2 proficiency on rationality

Abstract This study investigated the impact of reading statements in a second language (L2) versus the first language (L1) on core knowledge confusion (CKC), superstition, and conspiracy beliefs. Previous research on the Foreign Language Effect (FLE) suggests that using an L2 elicits less intense emotional reactions, promotes rational decision-making, reduces risk aversion, causality bias and superstition alters the perception of dishonesty and crime, and increases tolerance of ambiguity. Our results do not support the expected FLE and found instead an effect of L2 proficiency: Participants with lower proficiency exhibited more CKC, were more superstitious and believed more in conspiracy theories, regardless of whether they were tested in L1 or L2. The study emphasises the importance of considering L2 proficiency when investigating the effect of language on decision-making and judgements: It—or related factors—may influence how material is judged, contributing to the FLE, or even creating an artificial effect.

Investment Strategies for Risk-Averse Individuals

This study aims to explore investment strategies tailored for risk-averse individuals, who prioritize capital preservation over potential gains. Investing is vital for achieving financial independence and countering inflation, with a strong portfolio often emphasized by thought leaders like Warren Buffett. While high-risk investments can yield significant returns, low-risk options are essential for financial stability, especially for those averse to risk. The paper delves into risk aversion, highlighting a preference for security. Risk-averse investors typically opt for low- risk investments such as savings accounts, fixed deposits, municipal bonds, and gold, which provide steady returns but limited growth potential. Strategies like diversification and income investing are recommended to achieve a balance between stability and returns in conservative portfolios. The benefits of risk aversion include lower financial loss and stable income, but drawbacks may include reduced long-term returns and eroded purchasing power due to inflation. Factors influencing risk tolerance, such as age and income level, are also discussed. This study will evaluate various risk-averse investment techniques, including fixed-income investments, diversification, index funds, and conservative mutual funds. It will analyze their historical performance and adaptability to changing market conditions, aiming to empower risk-averse investors to make informed decisions that align with their financial goals. Keywords: ETFs, risk aversion, capital preservation

Funding deposit insurance

We present a quantitative model of deposit insurance to characterize the optimal levels of coverage for depositors and premiums raised from banks. Premiums contribute to a deposit insurance fund that lowers taxpayers’ resolution cost of bank failures. The key model tension is the policymaker’s dynamic tradeoff between building a fund to discourage moral hazard and insulate taxpayers from large fiscal shortfalls, and allowing banks to productively invest their deposits. We find that risk-adjusted premiums reduce moral hazard, enabling the policymaker to increase the share of covered deposits to total deposits by 12.5 percentage points and decrease the share of expected annual bank failures from 0.74% to 0.60%. The model predicts a fund-to-covered-deposits ratio that matches the data and declines in taxpayers’ income due to taxpayers’ risk aversion.

Bankruptcy experiences and cash holding behaviors: Case of Japan

Using data on Japanese listed firms, we find that companies are more likely to take risks when one or more of their directors experience corporate bankruptcy at another firm when serving concurrently as a director. Consequently, these companies reduce their cash reserves by issuing less equity. This tendency to take greater risk is concentrated in firms that are in a more favorable financial condition or where the interlocked bankruptcy firm has been through less costly bankruptcy. Our findings suggest that past experiences significantly shape individual preferences for taking risk, even if these experiences occur during their professional careers. Further, the effects of bankruptcy experiences on Japanese directors, who are usually considered risk averse, exhibit shifts in risk taking like that found in the US.

Religion and Household Saving Behavior

We examine the effect of religion on household saving behavior. For a sample of 12,686 U.S. households between 2000 and 2016, we find that religious households (i.e., households that have a religious affiliation) are more likely to hold savings accounts than non-religious households. Furthermore, using religious upbringing as an instrument, we show that religion-induced economic attitudes, such as future time preference and risk aversion, increase household saving propensity. Finally, the positive association between religious affiliation and saving propensity is more pronounced for Catholics than Protestants. Overall, our study highlights the importance of religion in shaping households’ saving behavior. (JEL G51, Z12, D14, D91)

Does Early-life Famine Exposure Lead to Healthy Later-life Dietary Behavior: Evidence from the Great Chinese Famine

This paper investigates the long-run effect of early-life exposure to famine on survivors’ dietary behavior. By exploiting exogenous variations in local severity of the Great Chinese Famine and variations of different cohorts, we conduct a difference-in-differences analysis. Based on detailed three-day food intake records from the China Health and Nutrition Survey, we find that famine exposure led the famine cohort who was conceived or born during the famine to adopt healthier dietary behaviors, as evidenced by a higher healthy eating score and a healthier dietary composition. Additionally, the pre-famine cohort exposed to the famine at ages 9-12 in late childhood exhibited a healthier food composition, characterized by a higher share of aquatic products. However, no statistically significant effects were observed for the pre-famine cohorts that experienced the famine in early and middle childhood. The results remain robust across various sensitivity checks. We propose that early-life famine exposure influences dietary behavior through mechanisms such as awareness of healthy eating, diet knowledge and risk aversion.

Association of Patients' Knowledge on the Disease and Its Management with Indicators of Disease Severity and Individual Characteristics in Patients with Chronic Obstructive Pulmonary Disease (COPD): Results from COSYCONET 2.

In patients with chronic diseases, including those with chronic obstructive pulmonary disease (COPD), knowledge on the disease and its self-management is considered as relevant for improving disease control and long-term outcome. We studied to which extent components of knowledge depended on potential predictors, such as participation in educational programs and disease severity. For example, the perception of exacerbations or GOLD grade might modulate the content and reliability of COPD understanding. Data from the German COSYCONET 2 COPD cohort was used, and 13 questions addressing knowledge and self-management were analyzed. Overall, 310 patients with the diagnosis of COPD of GOLD grades 1/2/3/4 as well as the former grade 0 were included (39.7% female, median age 66.0 years). The answers to 3 questions (knowledge of term exacerbation, pursed lip breathing technique, criteria for contacting a doctor) were improved (p < 0.05 each) when patients had had moderate-to-severe exacerbations, and to one question (breathing exercise) when having COPD grade 3/4 versus 0/1/2. The other 9 responses did not depend on disease severity, but most of the knowledge was improved when having participated in an educational COPD program. This was particularly true for knowledge that also depended on exacerbations, or if the treating physician was a pulmonary specialist. In some responses, the proportion of correct answers was significantly reduced in males compared to females. The dependence on education level, existence of a treatment plan, self-reported level of risk aversion and low depression score was weak and heterogeneous. These findings suggest that part of the disease-related knowledge in patients with COPD was reinforced by the experience of exacerbations, especially knowledge regarding criteria on contacting a physician. These observations might help in focusing education on those parts of knowledge that are considered as important by patients based on their own experience.

Exploring Post–COVID–19 Workforce Dynamics: An Experimental Study on Factors Affecting Job Acceptance in Goa

In the post-COVID-19 era, the dynamics of labor market participation and job acceptance have shifted significantly, driven by the development of societal and psychological factors. The study highlights the intricate interplay of psychological, societal, and economic factors influencing job acceptance in the post-pandemic labor market. It investigates the determinants of job acceptance, emphasizing the roles of risk aversion, marital status, and job attributes in Goa’s labor market. Using primary data collected from respondents aged 21-55, through stratified sampling, the study applies the Cragg Hurdle Model for analysis. Key findings reveal that job attributes, including flexible working hours, job security, commuting distance, promotion opportunities, and housing conditions, play a critical role in influencing job acceptance. Risk aversion emerged as a crucial psychological factor. Risk-averse individuals strongly preferred stable and predictable jobs, whereas risk-takers were more likely to accept positions with longer hours or fewer guarantees of security. During the pandemic, risk-averse individuals avoided roles involving higher perceived risks. Marital status positively influenced engagement, with married individuals displaying higher job acceptance rates due to the need for financial security and family stability. Marginalized groups experienced disparities in job acceptance due to socio-economic challenges and limited access to resources. Notably, job acceptance was affected by practical considerations, such as commuting time and accommodation conditions. While findings provide valuable insights into Goa’s labor market, limitations include the regional focus, which may restrict broader applicability. Policymakers should prioritize bridging the urban-rural divide and employers must design more flexible, stable, and growth-oriented roles to foster workforce engagement. Future research should employ longitudinal methods to capture changing labor market trends across wider contexts.

The dynamic relationship among economic and monetary policy, geopolitical risk, sentiment, and risk aversion: A TVP-VAR approach

We study how external economic and market uncertainty factors affect investors’ risk aversion. Utilizing TVP-VAR framework, we examine the impact of economic policy uncertainty (EPU), monetary policy uncertainty (MPU), geopolitical risk (GPR), and investor sentiment (Sent) on the risk aversion index (RAI). Our analysis reveals that (i) EPU and MPU are primary transmitters of shocks, significantly influencing RAI; (ii) GPR has a minimal and temporary effect, while Sent exhibits limited influence; and (iii) the impact on risk aversion has lessened, indicating growing market resilience to policy-related shocks. These findings underscore the psychological impact of economic instability on investors’ risk aversion.

Blockchain-backed resilient strategies in a stochastic supply chain sourcing and distribution environment under disruption: implications for B2B sector

Purpose With the changing landscape of the globalised business world, business-to-business supply chains face a turbulent ocean of disruptions. Such is the effect that supply chains are disrupted to the point of failure, supply is halted and its adverse effect is seen on the consumer. While previous literature has extensively studied risk and resilience through mathematical modelling, this study aims to envision a novel supply chain model that integrates blockchain to support visibility and recovery resilience strategies. Design/methodology/approach The stochastic bi-objective (cost and shortage utility) optimisation-based mixed-integer linear programming model integrates blockchain through a binary variable, which activates at a particular threshold risk-averse level of the decision-maker. Findings Firstly, visibility is improved, as identified by the average reduction of penalties by 36% over the different scenarios. Secondly, the average sum of shortages over different scenarios is consequently reduced by 36% as the recovery of primary suppliers improves. Thirdly, the feeling of shortage unfairness between distributors is significantly reduced by applying blockchain. Fourthly, unreliable direct suppliers resume their supply due to the availability of timely information through blockchain. Lastly, reliance on backup suppliers is reduced as direct suppliers recover conveniently. Research limitations/implications The findings indicate that blockchain can enhance visibility and recovery even under high-impact disruption conditions. Furthermore, the study introduces a unique metric for measuring visibility, i.e. penalty costs (lower penalty costs indicate higher visibility and vice versa). The study also improves upon shortages and recoveries reported in prior literature by 6%. Finally, blockchain application caters to the literature on shortage unfairness by significantly reducing the feeling of shortage unfairness among distributors. Practical implications This study establishes blockchain as a pro-resilience technology. It advocates that organisations focus on investing in blockchain to enhance their visibility and recovery, as it effectively reduces absolute shortages and feelings of shortage unfairness while improving recovery and visibility. Originality/value To the best of the authors’ knowledge, this is a unique supply chain model study that integrates a technology such as blockchain directly as a binary variable in the model constraint equations while also focusing on resilience strategies, costs, risk aversion and shortage unfairness.

Does CEO age matter in auditor choice and audit pricing? The role of CEO dominance

PurposeThis study examines the impact of the age of the chief executive officer (CEO) on the demand for audit quality, as reflected in auditor choice and audit fees. Furthermore, the study investigates whether CEO dominance moderates the association between CEO age, auditor choice and audit fees.Design/methodology/approachUsing a sample of 14,066 firm-year observations from 2000 to 2017, the study employs logistic regression and ordinary least squares (OLS) regressions to estimate the research models. The study also employs various techniques to address the endogeneity issue in the findings.FindingsUsing industry specialist auditors and brand name (Big 4) auditors as proxies, the study finds that firms with older CEOs are more likely to appoint higher-quality auditors. The study also finds that firms with older CEOs pay higher audit fees than firms with younger CEOs, which is likely to be due to increased demand for higher-quality audits and to risk aversion among older CEOs. In addition, the study finds that CEO dominance attenuates the positive association of CEO age with auditor choice and audit fees. The findings are found to be robust in our analyses, which address the endogeneity issue with firm fixed effects, two-stage least squares (2SLS) regression and entropy balancing. In addition, the study provides evidence that the positive association between CEO age and audit pricing persists when firms replace younger CEOs with older CEOs.Research limitations/implicationsThe study’s findings suggest that the United States (US) Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) may need to be more cautious when monitoring financial statements from firms with younger CEOs.Originality/valueThis study contributes to a growing stream of research investigating the links between managers’ idiosyncratic age differences and the quality of financial reporting and corporate decisions.

Red pandas on the move: weather and disturbance effects on habitat specialists

Challenging weather events can make winters harsh for habitat and diet specialists. They may also incur high energetic costs due to reduced availability of food resources and elevated predation risk. Using GPS satellite collars we tracked the movement of the red panda Ailurus fulgens in the Himalayas, and evaluated the effects of weather and disturbances on their movement patterns and habitat use. We also analyzed the nutritional content of their key diet plant species. The mean daily distance travelled by red pandas was 748 ± 40 m (median 573 m), with no detectable effect of weather conditions and snow age. However, males travelled further than females when there was snow on the ground (β = 410.5, p &lt; 0.02). Red pandas moved between 2528 and 3250 m during the study period with the mean elevation 2857 ± 107 m when snow was on the ground and 2816 ± 99 m without snow. A group of disturbances such as distance to settlements, herding stations, and roads, and geo‐physical variables affected their habitat use when the forest was covered with snow as they occupied areas away from human settlements (β = 0.36, p = 0.03), exhibited affinity for high elevations (β = 0.37, p = 0.02), and avoided steep slope (β = −0.21, p = 0.04). These movement patterns suggest a risk aversion strategy with males' behaviour appearing to be driven by reproductive instincts. Additionally, the distribution of their major dietary vegetation varied across the elevation gradient, leading to differences in the nutritional content of the diet, which might also have some effects on habitat use. Overall we found that despite red pandas exhibiting risk aversion behaviour, challenging weather events like snowfall could exacerbate the adverse effects on these habitat specialists.

Efficient Simulator for P2P Energy Trading: Customizable Bid Preferences for Trading Agents

Given the accelerating global movement towards decarbonization, the importance of promoting renewable energy (RE) adoption and ensuring efficient transactions in energy markets is increasing worldwide. However, renewable energy sources, including photovoltaic (PV) systems, are subject to output fluctuations due to weather conditions, requiring large-scale backup power to balance supply and demand. This makes trading electricity from large-scale PV systems connected to the existing grid challenging. To address this, peer-to-peer (P2P) energy markets where individual prosumers can trade excess power within their local communities have been garnering attention. This study introduces a simulator for P2P energy trading, designed to account for the diverse behaviors and objectives of participants within a market mechanism. The simulator incorporates two risk aversion parameters: one related to transaction timing, expressed through order prices, and another related to forecast errors, managed by adjusting trade volumes. This allows participants to customize their trading strategies, resulting in more realistic analyses of trading outcomes. To explore the effects of these risk aversion settings, we conduct a case study with 120 participants, including both consumers and prosumers, using real data from household smart meters collected on sunny and cloudy days. Our analysis shows that participants with higher aversion to transaction timing tend to settle trades earlier, often resulting in unnecessary transactions due to forecast inaccuracies. Furthermore, trading outcomes are significantly influenced by weather conditions: sunny days typically benefit buyers through lower settlement prices, while cloudy days favor sellers who execute trades closer to their actual needs. These findings demonstrate the trade-off between early execution and forecast error losses, emphasizing the simulator’s ability to analyze trading outcomes while accounting for participant risk aversion preferences.