Risk-taking Choices Research Articles

Enterprise risk management, corporate governance and insurers risk-taking behaviour in South Africa: evidence from a linear and threshold analysis

PurposeThis study examines the linear and non-linear effects of enterprise risk management (ERM) and corporate governance (CG) on insurers’ risk-taking behaviour.Design/methodology/approachThe study employed panel data of 63 insurers from South Africa over the period 2015 and 2019. The study used the generalised method of moments (GMM) to determine the direct relationship, while the dynamic panel threshold technique was utilised to discover whether there is non-linearity in the relationship and the threshold level at which ERM and CG stimulate insurance risk-taking.FindingsThe result from the GMM elicits a positive relationship between ERM and risk-taking, implying that insurers with a robust ERM system are more likely to pursue higher risks. The empirical evidence also suggests that board size and board independence improve insurers’ risk-taking. Contrarily, gender diversity shows an inverse relationship with risk-taking. The dynamic panel threshold regression confirms non-linearities between ERM, CG and risk-taking. The empirical evidence indicates a U-shaped relationship between ERM and risk-taking, implying that a robust ERM system increases insurers’ risk-taking and vice-versa. Further, board size and independence reveal an inverted U-shaped relationship, suggesting that larger boards and a higher proportion of independent directors exhibit lower risk-taking. However, gender diversity presents a negative relationship, demonstrating a strong impact at higher threshold levels. This tells that the presence of females on the board reduces insurers’ risk-taking preferences.Practical implicationsDue to the risk-bearing nature of the insurance business, it is required that they ensure a robust ERM system for prudent risk-taking decisions. This demands strict adherence to ERM principles and allocating sufficient resources for effective implementation. Also, there is a need for strong CG structures that pay more attention to diversity when selecting board members due to their influence in ensuring improved risk-taking choices.Originality/valueThis study contributes to the existing literature by providing insights into the under-researched role of ERM and CG in insurers’ risk-taking behaviour. The study further extends the literature by providing evidence on the non-linearity and threshold levels at which ERM and CG influence insurers’ risk-taking choices. The findings are unique and contribute to the growing body of literature documenting the need for strong ERM and CG systems in insurance companies.

Do you have a choice?: Implications for belief updating and the disposition effect

The present paper evaluates the importance of belief updating for the prevalence of the disposition effect – the reluctance to sell assets at losses as compared to gains. In particular, the present paper studies whether restricting choices in investment risk taking decisions motivates different learning from the decision outcomes and whether such differences in learning cause differences in the emergence of the disposition effect. The results show that investors learn from negative outcomes more like Bayesians if their risk-taking decisions are restricted. Causal mediation analysis reveals that such differences in learning increases the probability to sell after losses, which improves the overall investment performance. Compared to gains, the differences in learning after losses explain also why investors making active risk-taking choices are less likely to sell after losses as compared to gains, while the effect is reversed when choices are restricted. These findings suggest that restricting the discretion in decisions influences the way investors learn from decision outcomes and these differences in learning can explain puzzling differences in the risk-taking behavior of individual investors.

The Two Blades of the Scissors: Performance Feedback and Intrinsic Attributes in Organizational Risk Taking

We draw on the behavioral theory of the firm and prospect theory to examine how performance feedback (decision context) and the characteristics of the alternatives (decision content) that decision makers face jointly determine organizational risk-taking choices. While the behavioral theory of the firm has identified performance feedback’s important role in driving organizational risk-taking decisions, it has not considered the intrinsic attributes of alternatives, specifically the magnitude and likelihood of their outcomes, which have been the focus of prospect theory. We argue that these two attributes play a key role in decision makers’ assessment of alternatives, but because achieving organizational goals is the prime objective in organizations, performance feedback drives how decision makers process information regarding these attributes. Analyzing 23,895 fourth-down decisions from the U.S. National Football League, we find that decision makers weigh attainment discrepancy and the magnitude and likelihood of outcomes in their choices, depending on deadline proximity. Furthermore, the size and valence of attainment discrepancy modify the weight of the magnitude and likelihood of outcomes in risky choices. Our arguments and findings suggest extensions to the behavioral theory of the firm and imply modifications to prospect theory when applied to the organizational context.

Risk-taking for others: An experiment on the role of moral discussion

We study the effect of moral discussion when risk-taking choices entail a negative externality on others. In our experiment, the decision-maker chooses between two risky gambles, one of which entails a better outcome for himself but higher risk for the receiver. In the Moral Discussion treatments – before making a choice – decision-makers discuss the consequences of their choice within a group of peers. We also implement a Reflection treatment, where participants have to think before making their choice, and a baseline with an immediate decision. Our results show that, after a moral discussion, decision-makers choose more often the less risky gamble compared to the Reflection. Moreover, this effect does not depend on the mode of interactions among participants. Through a mediation analysis, we also show that this effect mainly unfolds through a significant modification of the beliefs about the behaviour of their peers.

Risking or Derisking: How Management Fees Affect Hedge Fund Risk-Taking Choices

AbstractHedge fund managers’ risk-taking choices are influenced by their compensation structure. We differ from most studies that focus on incentive fees and the high-water mark by examining how management fees affect managers’ risk-taking. Our simple model shows that managers’ risk-taking is negatively related to their future management fees. Using fund-level data, we find that future management fees are the dominant component of managers’ total compensation. When the contribution of future management fees increases, managers reduce risk-taking to increase survival probabilities. Moreover, funds with higher decreasing returns to scale are more sensitive to future management fees and reduce risk-taking even more.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Common genetic effects on risk-taking preferences and choices

Although prior research has shown that risk-taking preferences and choices are correlated across many domains, there is a dearth of research investigating whether these correlations are primarily the result of genetic or environmental factors. We examine the extent to which common genetic factors account for the association between general risk-taking preferences and domain-specific risk-taking preferences, and between general risk-taking preferences and risk taking choices in financial investments, stock market participation and business formation. Using data from 1898 monozygotic (MZ) and 1344 same-sex dizygotic (DZ) twins, we find that general risk-taking shares a common genetic component with domain-specific risk-taking preferences and risk-taking choices.

An Update Overview on Brain Imaging Studies of Internet Gaming Disorder.

There are a growing number of studies on structural and functional brain mechanisms underlying Internet gaming disorder (IGD). Recent functional magnetic resonance imaging studies showed that IGD adolescents and adults had reduced gray matter volume in regions associated with attention motor coordination executive function and perception. Adolescents with IGD showed lower white matter (WM) integrity measures in several brain regions that are involved in decision-making, behavioral inhibition, and emotional regulation. IGD adolescents had also disruption in the functional connectivity in areas responsible for learning memory and executive function, processing of auditory, visual, and somatosensory stimuli and relay of sensory and motor signals. IGD adolescents also had decreased functional connectivity of PFC-striatal circuits, increased risk-taking choices, and impaired ability to control their impulses similar to other impulse control disorders. Recent studies indicated that altered executive control mechanisms in attention deficit hyperactivity disorder (ADHD) would be a predisposition for developing IGD. Finally, patients with IGD have also shown an increased functional connectivity of several executive control brain regions that may related to comorbidity with ADHD and depression. The behavioral addiction model argues that IGD shows the features of excessive use despite adverse consequences, withdrawal phenomena, and tolerance that characterize substance use disorders. The evidence supports the behavioral addiction model of IGD by showing structural and functional changes in the mechanisms of reward and craving (but not withdrawal) in IGD. Future studies need to investigate WM density and functional connectivity in IGD in order to validate these findings. Furthermore, more research is required about the similarity in neurochemical and neurocognitive brain circuits in IGD and comorbid conditions such as ADHD and depression.

Gambling or De-Risking: Hedge Fund Risk Taking vs. Managers' Compensation

Hedge fund managers’ risk-taking choices are determined by their compensation. Managers derisk when the management fee becomes more important in total compensation, potentially to protect their existing assets and fee incomes. When funds are below their high-water marks, managers increase risk taking to recover past losses. Managers also take more risk when funds are above their high-water marks, possibly to further increase their compensation. During the recent financial crisis, managers herded more with their styles and decreased fund-specific risk. Finally, when fund managers take more risk, they do not generate better future performance and thus do not benefit investors.

All risk-taking is not the same: examining the competing effects of firm risk-taking with meta-analysis

Although researchers have vigorously studied organizational risk-taking for over 35 years, relatively little emphasis has been placed on theoretically differentiating the unique relationships between the many risk-taking choices organizations make and firm risk or firm performance. In this research, we propose a new framework that builds from March’s exploration–exploitation model to argue that different risk-taking choices can have substantially different influences on firm outcomes. We use meta-analysis to examine the unique and at times competing effects of four of the most commonly studied risk-taking choices on firm risk and firm performance. Results from a meta-analysis of 257 unique studies (N = 499,808) demonstrate support for our proposed framework and cast significant doubt on the idea that commonly studied firm risk-taking choices theoretically aggregate into one overarching risk-taking construct.

The Role of Social Novelty in Risk Seeking and Exploratory Behavior: Implications for Addictions.

Novelty preference or sensation seeking is associated with disorders of addiction and predicts rodent compulsive drug use and adolescent binge drinking in humans. Novelty has also been shown to influence choice in the context of uncertainty and reward processing. Here we introduce a novel or familiar neutral face stimuli and investigate its influence on risk-taking choices in healthy volunteers. We focus on behavioural outcomes and imaging correlates to the prime that might predict risk seeking. We hypothesized that subjects would be more risk seeking following a novel relative to familiar stimulus. We adapted a risk-taking task involving acceptance or rejection of a 50:50 choice of gain or loss that was preceded by a familiar (pre-test familiarization) or novel face prime. Neutral expression faces of males and females were used as primes. Twenty-four subjects were first tested behaviourally and then 18 scanned using a different variant of the same task under functional MRI. We show enhanced risk taking to both gain and loss anticipation following novel relative to familiar images and particularly for the low gain condition. Greater risk taking behaviour and self-reported exploratory behaviours was predicted by greater right ventral putaminal activity to novel versus familiar contexts. Social novelty appears to have a contextually enhancing effect on augmenting risky choices possibly mediated via ventral putaminal dopaminergic activity. Our findings link the observation that novelty preference and sensation seeking are important traits predicting the initiation and maintenance of risky behaviours, including substance and behavioural addictions.

To Bet or Not to Bet? The Error Negativity or Error-related Negativity Associated with Risk-taking Choices

The functional significance of error-related negativity (Ne/ERN), which occurs at approximately the same time as erroneous responses, has been investigated extensively using reaction time (RT) tasks. The error detection theory assumes that the Ne/ERN reflects the mismatch detected by comparing representations of the intended and the actually performed actions. The conflict monitoring theory asserts that the Ne/ERN reflects the detection of response conflict between intended and actually performed actions during response selection. In this study, we employed a gambling task in which participants were required to choose whether they would take part in betting in each trial and they were presented with gain or loss feedback in both the "to bet" and the "not to bet" trials. The response-locked ERP magnitudes were more negative for "to bet" than for "not to bet" choices for both large and small stakes and were more negative for choices involving large rather than small stakes. Dipole source analysis localized the ERP responses to the anterior cingulate cortex (ACC). These findings suggest that the ACC signals the riskiness of choices and may function as an early warning system that alerts the brain to prepare for the potential negative consequence associated with a risky action.

The impact of consolidation and safety-net support on Canadian, US and UK banks: 1893–1992

This study investigates bank consolidation and safety-net support provision in Canada, the UK and the US over a 100-year historical period, and the impact of these policy variables on bank capital and risk-taking choices. The study finds that consolidation and strengthened safety nets have largely supplanted the historical role of high bank capital levels in providing protection to risk-adverse depositors. Furthermore, despite strengthened safety-net guarantees, the study finds that bank asset-risk choices in the 1980s are comparable to those observed in the 1890s, while bank equity volatilities have shown approximately a 10-fold increase over this period. Finally, the study finds that bank capital ratios are as asset-risk sensitive in the 1980s as those in the 1890s, perhaps reflecting residual market discipline or regulatory moral-suasion effects.

Effects of Skewness of Initial Choices on the Risky Shift: An Experimental Test with the Use of Consumer Stimuli

The hypothesis that the risky shift phenomenon can be accounted for by skewed distributions of the subjects' initial risk-taking choices was investigated with the use of consumer stimuli. Skewness, manipulated in four experimental conditions, significantly affected group decisions and shifts. However, contrary to a majority-rule interpretation, significant cautious shifts did not occur when the distributions were negatively skewed.