Risk-seeking Behavior Research Articles

How Do Public Service Professionals Behave in Risky Situations? The Importance of Organizational Culture

Many situations in public service delivery are characterized by uncertainty about the potential negative consequences following decisions. These risky situations make the behavior of frontline professionals particularly important. But what shapes the risk perception and subsequent behavior of frontline professionals in risky situations? This article explores the idea that organizational culture provides part of the answer. To examine this, a comprehensive qualitative study with participant observations and interviews at five public hospital wards was conducted. The findings demonstrate the importance of organizational culture on risk perception and behavior in risky situations. Basic cultural assumptions related to professional discussion, administering medicine, grading of adverse events, and prioritizing follow-up activities matter to behavior in risky situations. In organizational cultures with high levels of trust and dialogue about decision-making, the health professionals rely on each other and ask for second opinions, when making decisions in risky situations. Conversely, in organizational cultures with little trust and professional discussion, the health professionals are less likely to ask for second opinions and follow up on risky situations, which increases the possibility of unintended, negative consequences. In this way, organizational culture can be a driver of risk-reducing and risk-seeking behavior among frontline professionals.

Exploring Higher Order Risk Preferences of Farmers in a Water-Scarce Region: Evidence from a Field Experiment in West Bengal, India

We estimate higher order risk preferences of farmers from a water scarce region in West Bengal, India. We then examine correlations across risk aversion, prudence and temperance attitudes of farmers, and explore associations of these preferences with household characteristics. Our experimental findings indicate risk seeking behaviour of farmers. We find that farmers took more prudent and temperate decisions. Risk aversion and prudence have a significant negative correlation, whereas prudence and temperance have a significant positive correlation. Individual characteristics such as age, education, and entrepreneurship, income and value of assets are also correlated with various risk preferences. Increased stated drought resilience of farmers is positively correlated with prudence. Farmers affected by water scarcity in the Kharif make imprudent choices. Farmers with higher cropping intensities exhibit high levels of prudence and temperance. These findings have important theoretical and policy implications which we discuss in the paper.

The adaptive value of probability distortion and risk-seeking in macaques' decision-making.

In humans, the attitude toward risk is not neutral and is dissimilar between bets involving gains and bets involving losses. The existence and prevalence of these decision features in non-human primates are unclear. In addition, only a few studies have tried to simulate the evolution of agents based on their attitude toward risk. Therefore, we still ignore to what extent Prospect theory's claims are evolutionarily rooted. To shed light on this issue, we collected data from nine macaques that performed bets involving gains or losses. We confirmed that their overall behaviour is coherent with Prospect theory's claims. In parallel, we used a genetic algorithm to simulate the evolution of a population of agents across several generations. We showed that the algorithm selects progressively agents that exhibit risk-seeking, and has an inverted S-shape distorted perception of probability. We compared these two results and found that monkeys' attitude toward risk is only congruent with the simulation when they are facing losses. This result is consistent with the idea that gambling in the loss domain is analogous to deciding in a context of life-threatening challenges where a certain level of risk-seeking behaviour and probability distortion may be adaptive. This article is part of the theme issue 'Existence and prevalence of economic behaviours among non-human primates'.

Risk-Seeking Behavior and its Implications for the Optimal Decision Making of Annuity Insurers

This study investigates risk-seeking and optimal decisions of annuity providers. On the basis of a sample of U.S. life and annuity (L/A) insurers between 1997 and 2016, the results show clear performance-dependent risk attitudes. Specifically, insurers with returns below aspiration levels take more risks, whereas those with returns above reference levels decrease their risk-seeking, which supports the basic propositions of the cumulative prospect theory (CPT). Given initial evidence of mixed risk preferences in the L/A insurance industry, we derive an annuity insurer’s optimal investment and business strategies in a CPT decision-making framework. We show that changing risk preferences considerably affect an annuity provider’s decisions. We further illustrate how risk management changes an annuity insurer’s optimal strategies. Our results suggest that risk management lowers downside risk and allows a loss-averse decision-maker to assume more risk and achieve a higher level of utility.

Public Information and Capital Flows: Evidence from a Betting Market

Using a shock to transparency in a parimutuel betting market, we show that capital flows increase in public information even in markets with largely risk-seeking participants. The evidence indicates that capital allocation decisions are partly a function of behavioral mechanisms such as the illusion of control. More broadly, our results suggest transparency can facilitate gambling behavior, a result with implications for the many settings in which decision-makers are not globally risk averse but rather exhibit local risk-seeking behavior. Our findings also inform policy debate on whether and how to use transparency to address speculative flows in financial markets.

Only Friends Can Betray You: International Rivalry and Domestic Politics

ABSTRACT This article argues that dramatic political change in State A poses a threat to the interests that other states B share with it. The more salient those interests are to State B, the greater the threat posed by domestic political change within State A. Thus major changes in one state place the leaders of formerly friendly states into a domain of losses, motivating risk-seeking behavior in hopes of reversing these losses. Conversely, the new leaders of the state undergoing domestic political change initiate similarly risk-seeking behavior to defend their new endowments. The conflicts that result sow the seeds of long-lasting enmity (rivalry) between former partners. I test this argument in a dataset of rivalry onset during the period 1950–2005 and find evidence that in the wake of dramatic political change in State A, rivalries are most likely to form between A and its close partners.

Stochastic representation decision theory: How probabilities and values are entangled dual characteristics in cognitive processes.

Humans are notoriously bad at understanding probabilities, exhibiting a host of biases and distortions that are context dependent. This has serious consequences on how we assess risks and make decisions. Several theories have been developed to replace the normative rational expectation theory at the foundation of economics. These approaches essentially assume that (subjective) probabilities weight multiplicatively the utilities of the alternatives offered to the decision maker, although evidence suggest that probability weights and utilities are often not separable in the mind of the decision maker. In this context, we introduce a simple and efficient framework on how to describe the inherently probabilistic human decision-making process, based on a representation of the deliberation activity leading to a choice through stochastic processes, the simplest of which is a random walk. Our model leads naturally to the hypothesis that probabilities and utilities are entangled dual characteristics of the real human decision making process. It predicts the famous fourfold pattern of risk preferences. Through the analysis of choice probabilities, it is possible to identify two previously postulated features of prospect theory: the inverse S-shaped subjective probability as a function of the objective probability and risk-seeking behavior in the loss domain. It also predicts observed violations of stochastic dominance, while it does not when the dominance is "evident". Extending the model to account for human finite deliberation time and the effect of time pressure on choice, it provides other sound predictions: inverse relation between choice probability and response time, preference reversal with time pressure, and an inverse double-S-shaped probability weighting function. Our theory, which offers many more predictions for future tests, has strong implications for psychology, economics and artificial intelligence.

Irrational Responses to Risk Preference Questionnaires by Patients with Diabetes with or without Retinopathy and Comparison with Those without Diabetes.

PurposeThe risk preferences of patients with diabetes have profound effects on the progression of complications. The present study aimed to clarify whether the preferences of patients with diabetes and retinopathy are deliberately risk-seeking or irrational and whether this propensity is specific to those with retinopathy or is also found in patients without retinopathy compared with those without diabetes.Patients and MethodsA total of 394 patients with diabetes (264 without retinopathy and 130 with retinopathy) and 198 patients without diabetes agreed to participate in this survey. The questions were modified versions of those from the Japan Household Survey on Consumer Preferences and Satisfaction, which sought to determine the participants’ personal socioeconomic status and risk preferences. In the questionnaires, responses were analyzed by determining the participants’ willingness to pay for a lottery ticket and for an insurance policy. Irrational responses were defined as violations of two axioms of the Expected Utility Theory: completeness and transitivity.ResultsThe incidence of irrational responses increased with age and was associated with educational level. The incidence of irrational responses was significantly higher in patients with retinopathy than in those without retinopathy after adjusting for age and educational level. There was no significant difference in the incidence of irrational responses between patients with diabetes but without retinopathy and those without diabetes.ConclusionThe risk-seeking behavior of patients with diabetes and retinopathy was not deliberate but was irrational under uncertainty. Medical professionals should be aware of their patients’ propensity to make irrational decisions, which is an important risk factor for the progression of retinopathy in patients with diabetes regardless of age and educational level.

Betting the farm and playing it safe? Hyper-core self-evaluation in decisions when managers are winning and losing

Core self-evaluation summarizes a decision maker’s self-worth. This key personality trait has been shown to lead to extreme performance consequences of either winning or losing big. We suggest that these extreme performance outcomes may partly rest in how core self-evaluation affects executive’s perception and evaluation of risk in choices under uncertainty. We conducted a choice experiment building on the original prospect theory experiments with 97 executives, in which we measured the effect of core self-evaluation on risk behavior. As a robustness test, we replicated and validated our findings with a larger sample of 111 executives. Building on the tenets of prospect theory, we show that decision makers with high levels of core self-evaluation are less loss averse. Surprisingly, this effect differs depending on whether gains or losses are highlighted in the decision. For gains, higher levels of core self-evaluation are associated with behaviors that are closer to risk neutrality. For losses, however, we find that higher levels of core self-evaluation further enhance the risk-seeking behavior of decision makers. These findings contribute towards understanding the effects of core self-evaluation in the work environment as well as in the decision process and provide an additional lens for studying how the personality of executives affects choices under uncertainty.

Salience and Mutual Fund Investor Demand for Idiosyncratic Volatility

We find that mutual fund investors are more likely to both purchase and redeem funds with high idiosyncratic volatility (IV). Investors’ tendency to purchase high IV funds is largely driven by high IV funds having more extreme returns, which increases the salience of the fund. Including flexible controls for extreme past returns over multiple horizons decreases the effect of IV on new investment, and experimental evidence corroborates that increasing the salience of extreme returns increases investor demand for IV. Demand for IV is higher among retail investors and funds with otherwise lower salience. Collectively, the evidence suggests that extreme returns attract investor attention and contribute to investors’ risk seeking behavior when purchasing mutual funds. This paper was accepted by David Simchi-Levi, finance.

The Impact of CEOs’ Characteristics on Corporate Leverage: Indian Scenario

Ever since the prominent work by Modigliani and Miller (1958), much research has been undertaken in trying to identify the factors affecting the capital structure. Lately, behavioural finance has begun to take hold of a more prominent position in trying to explain aspects of finance which traditional research has failed to clarify. In fact, a growing body of empirical evidence suggests that manager-specific characteristics significantly influence firms' financing decisions. The limited work carried out in lower-middle income countries drives us to thoroughly investigate the role played by CEOs’ characteristics in determining corporate financing decisions.Employing a sample of 307 non-financial firms listed in Nifty 500 index, the panel regression results indicate that CEO tenure is significantly and positively associated to firm’s leverage for the possible reason that a long tenure of CEO reflects strong networks and alliances with important stakeholders that allow the CEO to compose, foster, and support risky initiatives like raising debt. Further, the level of leverage is higher at organizations where CEOs are younger on account of the fact that career and financial securities are imperative to a greater extent for older executives; therefore they may evade risky engagements that may interfere with their securities. The results also display that CEO share ownership has a significantly negative relationship to leverage because these executives have a large share of their personal wealth capitalized in the firm in the shape of firm-specific human capital and common stock holdings. This makes managerial insiders unwilling to use the optimum amount of debt funding for the firm for the reason that additional bankruptcy risk associated with higher levels of debt may arise.The findings thus put forward that recurrent job changes among the senior officials should be discouraged because the subsequent short-term focus and dearth of firm-specific knowledge might promote risk evasion. It shows that elder executives desire a more conservative capital structure whereas younger executives endeavour to take more risk. So, there is a need to bring diversification in the management so as to take advantage from the skills and services of the young. The inverse association between CEO share ownership and firm leverage specifies that board of directors and the shareholders should be stringent in checking managers to make sure they perform as per the interests of shareholders. It seems that while making capital structure decisions risk seeking behaviour favouring high corporate leverage is important and should be encouraged.

High-Efficacy Disease-Modifying Therapies in People with Relapsing–Remitting Multiple Sclerosis: The Role of Risk Attitude in Treatment Decisions

Risk attitude is defined as the willingness to tolerate risk to achieve a greater expected return. Limited information is available on how relapsing-remitting multiple sclerosis people's perceptions about disease trajectory and risk attitude may influence treatment choices. A non-interventional study applying principles of behavioral economics was conducted to assess willingness to receive unwarranted high-efficacy disease-modifying therapy (DMT) according to best-practice guidelines. People with relapsing-remitting multiple sclerosis (PwRRMS) according to 2010 McDonald criteria completed a survey on symptom severity, risk preferences, and management of simulated case scenarios mimicking the current treatment landscape. PwRRMS's choice for high-efficacy agents was established as the participant's selection of monoclonal antibodies for case scenarios with at least 2years of clinical and radiological stability. A total of 211 PwRRMS were studied (mean age 39.1 ± 9.5years, 70.1% female, mean Expanded Disability Status Scale score 1.8 ± 1.1). Almost 50% (n = 96) opted for a high-efficacy DMT despite the lack of evidence of disease activity. Younger age and risk-seeking behavior were associated with an increased likelihood of selecting unwarranted high-efficacy DMT [odds ratio (OR) 2.00, 95% confidence interval (CI) 1.02-3.93, p = 0.043, and OR 2.17, 95% CI 1.09-4.30, p = 0.027, respectively]. Clinical characteristics or subjective perception of symptom severity had no influence on participants' treatment choices. Identifying PwRRMS with risk-seeking behavior would be crucial to implementing specific educational strategies to manage information on disease prognosis, treatment expectations, and safety risk knowledge.

User Equilibrium Analysis Considering Travelers’ Context-Dependent Route Choice Behavior on the Risky Traffic Network

This paper studies travelers’ context-dependent route choice behavior in a risky trafficnetwork from a long-term perspective, focusing on the effect of travelers’ salience characteristics. In particular, a flow-dependent salience theory is proposed for this analysis, where the flow denotes the traffic flow on the risky route. In the proposed model, travelers’ attention is drawn to the salient travel utility, and the objective probabilities of the state of the world are replaced by the decision weights distorted in favor of this salient travel utility. A long-run user equilibrium will be achieved when no traveler can improve his or her salient travel utility by unilaterally changing routes, termed salient user equilibrium, which extends the scope of the Wardropian user equilibrium. Furthermore, we prove the existence and uniqueness of this salient user equilibrium. Finally, numerical studies demonstrate our theoretical findings. The equilibrium results show non-intuitive insights into travelers’ route choice behavior. (1) Travelers can be risk-seeking (the travel utility of a risky route is small with a relatively high probability), risk-neutral (in special situations), or risk-averse (the travel utility of a risky route is large with a relatively high probability), which depends on the salient state. (2) The extent of travelers’ risk-seeking or risk-averse behavior depends on their extent of salience bias, while the risk-neutral behavior is irrelative to this salience bias.

Organizational Response to Shortfalls: The Role of Decision Makers’ Self-Confidence and Time Slack

The behavioral theory of the firm (BTOF) states that performance shortfalls trigger organizational responses seeking to restore performance above the aspiration level. However, previous research has shown weak support for this proposition. One explanation for this lack of support is optimistic performance assessments: Performance shortfalls might not be perceived as problematic by decision makers, which leads them to underestimate the need for a response. In this paper, I argue that decision makers’ self-confidence promotes optimistic interpretations of performance assessments when performance is ambiguous enough. However, when performance shortfalls are unambiguous, I predict that decision makers’ self-confidence leads to the opposite consequence, strong organizational responses, due to risk-seeking behavior. In addition, in this paper I propose that organizational slack is a source of ambiguity in performance assessments allowing for favorable interpretations. Particularly, I propose that decision makers prone to make optimistic performance assessments overestimate the value they can extract from slack, which leads them to underestimate the need for a response to performance shortfalls. I find support for my hypotheses by analyzing 101,146 first down decisions from the National Football League (NFL) between seasons 2009 and 2016.

Performance, Satisfaction, or Loss Aversion? A Meso–Micro Assessment of Local Commitments to Sustainability Programs

Abstract A normative assumption of government reform efforts such as New Public Management is that fostering a more innovative, proactive, and risk-taking organizational culture—developing what has been described as an “entrepreneurial orientation” (EO)—improves performance. But in arenas like urban sustainability, performance can be an ambiguous, multifaceted concept. Managers’ assessments of their own nimbleness, innovative thinking, and risk culture are also likely to influence how they interpret the risk-reward balance of opportunities to enhance organizational performance. This study examines how meso-level organizational decisions impact managers’ individual risk-assessments of sustainability initiatives. We do so through a combination of Bayesian structural equation modeling of US local government survey data collected over two time periods, and an artifactual survey experiment with empaneled local government employees. This multimethod design allows us to examine the role of organizational performance and EO—meso-level learning heuristics—in shaping the micro-foundations of managerial risk assessment. The organization-level observational results indicate that local governments engage in risk-seeking behavior in order to minimize their potential for losses of prior effort. Experimental results confirm local government administrators are loss-averse when asked to evaluate the merits of initiating a hypothetical sustainability program.

Behavioral portfolio insurance strategies

Portfolio insurance strategies that ensure a certain minimum portfolio value or floor such as the Constant Proportion Portfolio Insurance (CPPI) and the Option-based Portfolio Insurance are economically important and widely spread among the banking and insurance industries. In distress and volatile market environments, investors such as pension funds have a need to insure their portfolios against downside risk in order to meet certain future payments or liabilities. Non-anticipated shocks or negative interest rates, jumps, crashes, or overnight trading restrictions in stock prices could drop pension fund portfolios below desired levels (present value of pension obligations) making them underfunded with pension assets to pension liabilities ratio below 100%. In particular, within the current low interest rate environment, a high number of pension funds happen to be underfunded which is a severe practical problem. Because of such scenarios, there is a need for an investment strategy which covers both the case of funded and underfunded portfolios. This article introduces a novel strategy which generalizes the CPPI approach. It has the overall target of guaranteeing the investment goal or floor while participating in the performance of the assets and limiting the downside risk of the portfolio at the same time. We show that the strategy accounts for behavioral aspects of the investor such as distorted probabilities, a risk-averse behavior for gains, and a risk-seeking behavior for losses. The proposed strategy turns out to be optimal within the Cumulative Prospect Theory framework by Tversky and Kahneman (J Risk Uncertain 5(4):297–323, 1992).

Risk-Aware Data Offloading in Multi-Server Multi-Access Edge Computing Environment

Multi-access Edge Computing (MEC) has emerged as a flexible and cost-effective paradigm, enabling resource constrained mobile devices to offload, either partially or completely, computationally intensive tasks to a set of servers at the edge of the network. Given that the shared nature of the servers' resources introduces high computation and communication uncertainty, in this paper we consider users' risk-seeking or loss-aversion behavior in their final decisions regarding the portion of their computing tasks to be offloaded at each server in a multi-MEC server environment, while executing the rest locally. This is achieved by capitalizing on the power and principles of Prospect Theory and Tragedy of the Commons, treating each MEC server as a Common Pool of Resources available to all the users, while being rivarlous and subtractable, thus may potentially fail if over-exploited by the users. The goal of each user becomes to maximize its perceived satisfaction, as expressed through a properly formulated prospect-theoretic utility function, by offloading portion of its computing tasks to the different MEC servers. To address this problem and conclude to the optimal allocation strategy, a non-cooperative game among the users is formulated and the corresponding Pure Nash Equilibrium (PNE), i.e., optimal data offloading, is determined, while a distributed low-complexity algorithm that converges to the PNE is introduced. The performance and key principles of the proposed framework are demonstrated through modeling and simulation, while useful insights about the users' data offloading decisions under realistic conditions and behaviors are presented.

Prospect Theory, Cascade Effects, and Migration: Analyzing Emigration “Fevers” in the Historical Atlantic World

Alongside the long-term migration systems that developed between Europe and the Americas, Atlantic migration history is replete with anomalous events—migration “fevers” that lie outside well-described norms in migratory processes. Prospect theory finds risk-seeking behavior to have been a compelling pre-condition for two instances of such migration fever in the eighteenth and nineteenth centuries, as well as for their subsequent cascade effects, creating a social dynamic of “irrational” migration. Prospect theory provides a testable framework for understanding why and how short-lived migration episodes acquired so much force and intensity and points toward a broader relationship with accepted decision-making structures in migration studies.

Exploring the Relationship between Risk and Performance in Listed Indian Firms

This paper analyses the relationship between a firm’s accounting risk and performance for a large sample of listed Indian firms observed over the period 2000–2015. We find evidence that the relationship is not absolute but contingent on the level of firm performance. We show that poorly performing firms below a threshold level of performance exhibit a ‘paradoxical’ or inverse relationship, while the firms above the threshold exhibit a non-linear relationship with a clear point of inflection. We posit that the former observation is due to a risk-seeking behaviour by the poor performers in line with behavioural finance theories while the latter is a result of a mixed-risk-behaviour.

Data Offloading in UAV-Assisted Multi-Access Edge Computing Systems: A Resource-Based Pricing and User Risk-Awareness Approach.

Unmanned Aerial Vehicle (UAV)-assisted Multi-access Edge Computing (MEC) systems have emerged recently as a flexible and dynamic computing environment, providing task offloading service to the users. In order for such a paradigm to be viable, the operator of a UAV-mounted MEC server should enjoy some form of profit by offering its computing capabilities to the end users. To deal with this issue in this paper, we apply a usage-based pricing policy for allowing the exploitation of the servers’ computing resources. The proposed pricing mechanism implicitly introduces a more social behavior to the users with respect to competing for the UAV-mounted MEC servers’ computation resources. In order to properly model the users’ risk-aware behavior within the overall data offloading decision-making process the principles of Prospect Theory are adopted, while the exploitation of the available computation resources is considered based on the theory of the Tragedy of the Commons. Initially, the user’s prospect-theoretic utility function is formulated by quantifying the user’s risk seeking and loss aversion behavior, while taking into account the pricing mechanism. Accordingly, the users’ pricing and risk-aware data offloading problem is formulated as a distributed maximization problem of each user’s expected prospect-theoretic utility function and addressed as a non-cooperative game among the users. The existence of a Pure Nash Equilibrium (PNE) for the formulated non-cooperative game is shown based on the theory of submodular games. An iterative and distributed algorithm is introduced which converges to the PNE, following the learning rule of the best response dynamics. The performance evaluation of the proposed approach is achieved via modeling and simulation, and detailed numerical results are presented highlighting its key operation features and benefits.