Role Of Risk Aversion Research Articles

Transcending Food-Miles: Unpacking the Drivers of In-Store Vertical Farming Adoption Among Food Retailers in France

This paper examines the potential of in-store vertical farming technologies in urban food retail as a solution to the increasing demand for fresh, locally sourced food. By enabling a “sell where you produce” model, vertical farming can reduce food miles, enhance traceability, and lower carbon emissions. The study applies the Unified Theory of Acceptance and Use of Technology (UTAUT) to analyze factors influencing the adoption of these technologies among food retailers in Rouen, France, with a particular focus on the role of risk aversion in shaping attitudes and decisions. The findings highlight that performance expectancy and facilitating conditions are the key drivers of adoption intentions among retail store managers. However, perceived risks, such as high investments and operational costs, pose significant barriers, while social influence appears to have little impact on their decisions. The study underscores the importance of conducting economic evaluations and risk assessments of vertical farming practices to ensure their long-term viability. As vertical farming holds the potential to boost fresh food production in urban areas, reduce food miles, and create sustainable supply chains, it is crucial to carefully weigh its benefits and risks to support its successful adoption in urban food retail.

The Impact of Commitment on Pending Home Sales in Entrapping Situations

This paper examines the decision-making processes of home buyers during the Global Financial Crisis, with a specific focus on passive coping mechanisms and the role of risk aversion. The study investigates how risk aversion influences the behavior of home buyers and highlights the disparities between high-income and low-income buyers. The findings reveal that high-income home buyers exhibit a risk aversion parameter that ranges from 1.74 to 1.99, while low-income home buyers have a parameter that ranges from 0.60 to 0.62, thus indicating different levels of risk tolerance and decision-making patterns among the income groups. These findings suggest that low-income home buyers are more likely to endure unfavorable situations or avoid making changes in periods of declining house prices than high-income home buyers. This behavior aligns with the concept of passive coping, where low-income home buyers choose to endure unfavorable situations rather than making changes because they fear the negative outcomes that may arise from taking a different course of action. They might worry that if they abandon the contract, they will miss out on the opportunity to own a home, live in a desirable neighborhood, or secure a specific property. This fear of potential losses leads them to choose passive coping, where they endure the current situation rather than making changes that could involve risks or uncertainties.

The Impact of Commitment on Pending Home Sales in Entrapping Situations

This paper examines the decision-making processes of home buyers during the Global Financial Crisis, with a specific focus on passive coping mechanisms and the role of risk aversion. The study investigates how risk aversion influences the behavior of home buyers and highlights the disparities between high-income and low-income buyers. The findings reveal that high-income home buyers exhibit a risk aversion parameter that ranges from 1.74 to 1.99, while low-income home buyers have a parameter that ranges from 0.60 to 0.62, thus indicating different levels of risk tolerance and decision-making patterns among the income groups. These findings suggest that low-income home buyers are more likely to endure unfavorable situations or avoid making changes in periods of declining house prices than high-income home buyers. This behavior aligns with the concept of passive coping, where low-income home buyers choose to endure unfavorable situations rather than making changes because they fear the negative outcomes that may arise from taking a different course of action. They might worry that if they abandon the contract, they will miss out on the opportunity to own a home, live in a desirable neighborhood, or secure a specific property. This fear of potential losses leads them to choose passive coping, where they endure the current situation rather than making changes that could involve risks or uncertainties.

A Comparative Study of the Investment Behavior of Financial Asset Investors

In China's capital market, investors can be divided into two categories: individual investors and institutional investors. Different from foreign capital markets, in China's capital market, individual investors account for a relatively high proportion of investors, China's market is basically dominated by individual investors, retail characteristics are obvious. Due to the short establishment of China's capital market, it is not a completely effective market, the entry threshold is low, the education of investors is not perfect, the investment literacy and investment knowledge accumulation of individual investors is not high enough, and due to the existence of investor cognitive bias, individual investors are often in a weak position in the capital market, and the investment returns of individual investors are often lower than those of institutional investors. Therefore, the research in this paper is aimed at the investment behavior of individual investors. The research includes the influence of individual characteristics of investors on investment decision-making behavior, the effect of Internet media use on urban and rural households' financial investment behavior, the regional heterogeneity of residents' choice of financial assets, the role of risk aversion and subjective well-being on family participation in risk financial markets, and the influence of family age structure, health status, financial experience, financial literacy and trust on household financial asset allocation.

On the Role of Risk Aversion and Market Design in Capacity Expansion Planning

Investment decisions in competitive power markets are based upon thorough profitability assessments. Thereby, investors typically show a high degree of risk aversion, which is the main argument for capacity mechanisms being implemented around the world. In order to investigate the interdependencies between investors’ risk aversion and market design, we extend the agent-based electricity market model PowerACE to account for long-term uncertainties. This allows us to model capacity expansion planning from an agent perspective and with different risk preferences. The enhanced model is then applied in a multi-country case study of the European electricity market. Our results show that assuming risk-averse rather than risk-neutral investors leads to slightly reduced investments in dispatchable capacity, higher wholesale electricity prices, and reduced levels of resource adequacy. These effects are more pronounced in an energy-only market than under a capacity mechanism. Moreover, uncoordinated changes in market design may also lead to negative cross-border effects.

Financial market economy vs self-financing economy and the role of risk aversion

This paper revisits the thesis of Levine (1991) on the positive contribution of the financial market on the rate of economic growth. According to the author, the stock market performs, because it facilitates the formation of capital by increasing the liquidity of the market. In contrast, the economy private financial markets would be less effective. Such a conclusion is yet far from obvious. From the model of Levine (1991), we examine the equilibrium proportion invested in high-return (illiquid) projects and we show that the self-financing economy can record a growth rate higher than that of the economy of financial markets. Regardless of the stock market, economic growth is related to the interactions between the aversion to risk and the parameters of the set of production.

Used-Part-Collection Programs in Manufacturing Systems for Products With Reusable Parts: Roles of Risk Aversion and Platforms

Many consumer products, e.g., printer’s cartridges, milk’s glass bottles, etc., are sold with reusable parts, which can be formally collected under a used-part-collection (UPC) program. In today’s markets with high volatility, risk is present for UPC operations. In this article, building via standard consumer utility-based models, we uncover the value of the UPC program in a production system. In the basic model, we consider the case when the manufacturer is risk averse. For both the cases with and without UPC, the optimal product pricing and quality decisions are determined and the respective manufacturer’s utility and consumer surplus are derived. The values of UPC to the manufacturer and consumers are found. We find that: 1) both quality improvement and UPC can be beneficial to consumers under some situations and 2) the optimal quality level, the optimal utility, and the consumer surplus are independent of the return fee. In the extended models, we explore two cases, namely, the case when consumers are risk averse, and the case with a collection platform, which can enhance the collection rate. We find that no matter what the level of consumers’ risk averse is, it reduces consumers’ benefits. Moreover, a higher platform’s power is beneficial to the manufacturer and consumers but may reduce the platform’s profit.

The Effects of Risk Aversion and Uncertainty Avoidance on Information Search and Brand Preference: Evidence from the Chinese Dairy Market

ABSTRACT For decades, research and practice have recognized the significant effects of risk aversion and uncertainty avoidance on consumer behavior. These two concepts are often used interchangeably and studied as an integrated factor in marketing literature. Despite the relationship between risk aversion and uncertainty avoidance, it is necessary to differentiate between the two concepts to address the inaccuracy in definition and application. This research investigates Chinese dairy consumers who experienced one of the most significant food safety crises in recent years. Based on a structural equation modeling analysis, this study reveals that risk aversion and uncertainty avoidance have different effects on consumers’ information search, perceived quality and brand loyalty. Therefore, future research should recognize the different roles of risk aversion and uncertainty avoidance in consumer behavior. Practitioners should target risk-averse and uncertainty-avoiding consumers as distinct groups, based on different marketing communication campaigns.

Financial Products and Family Business Innovation Strategy

Abstract This paper studies the influence of purchasing financial products (FPs) on the innovation strategy of family businesses (FBs) under the background of Chinese system. Applying a difference in difference methodology we are able to compare FBs who have purchased FPs with FBs who have not yet purchased FPs, and compare FBs that have purchased FPs before and after the purchase. We distinguish between different patent types (invention, utility, and design), and find that purchasing FPs significantly increase the design patents of FBs. That means buying FPs will shift innovation direction to safer and more economical path. Moreover, the effect of purchasing FPs on innovation outputs is governed by institutional ownership, government subsidy, and R&D personnel ratio. This paper contributes to our understanding of the important role of risk aversion in technological innovation strategy of FBs.

Students’ Preference for Skipping Questions in Exams with Negative Marking: The Role of Risk Aversion and Confidence

Students’ Preference for Skipping Questions in Exams with Negative Marking: The Role of Risk Aversion and Confidence

On the hedging benefits of REITs: The role of risk aversion and market states

We propose a dynamic, forward-looking hedging strategy to manage stock market risks via positions in REITs, conditional on the level of risk aversion. Our findings show that REITs do not only offer significant risk reduction for passive portfolios, but also offer much improved risk-adjusted returns with the greatest benefits observed for Australia, Canada and the U.S. Overall, our findings suggest that time-varying risk aversion can be utilized to (i) establish effective hedges against stock market risks via positions in REITS, and (ii) improve the risk-return profile of passive portfolios.

Religion and unproductive entrepreneurship: The role of risk aversion

Institutions can shape the reward structure in the economy and thereby influence the allocation of entrepreneurship between productive and unproductive activities. This paper investigates the effect of religion, one important component of informal institutions, on unproductive entrepreneurship. Using a nationally representative survey on private enterprises in China, we find that religious entrepreneurs devote more of their resources, both in terms of money and time, to unproductive activities such as building social relations than their nonreligious peers. We further find that religion plays a significant role only in regions with weak regulatory institutions and/or for entrepreneurs vulnerable to institutional risks. Drawing on the close link between risk-aversion and religion, our results suggest that religious entrepreneurs engage in unproductive activities so as to reduce institutional risks in their business operations.

The interplay between risk and protective factors during the initial height of the COVID-19 crisis in Italy: The role of risk aversion and intolerance of ambiguity on distress.

The present study aimed to test a model of relations to ascertain the determinants of distress caused by lockdown for COVID-19. It was hypothesized that the exposure to the COVID-19 increased distress directly and through the mediation of worry, health-related information seeking, and perception of the utility of the lockdown. It was also expected that higher levels of ambiguity intolerance corresponded to higher distress directly and through the mediation of worry, health information seeking behaviors, and perceived utility of the lockdown. Finally, it was expected that risk aversion positively influenced distress directly and through the increasing of worry, health-related information seeking behavior, and more positive perception of the utility of the lockdown The study was conducted in Italy during the mandatory lockdown for COVID-19 pandemic on 240 individuals (age range 18–76). Data recruitment was conducted via snowball sampling. COVID-19 exposure was positively associated with worry and health-related information seeking. Risk-aversion was positively associated with health-related information seeking and perceived utility of the lockdown to contain the spread of the virus. Worry and health-related information seeking were positively associated with distress, whereas the perceived utility of the lockdown was negatively associated with distress. Intolerance for the ambiguity was directly linked to distress with a positive sign. Findings suggest that risk aversion represents both a risk factor and a protective factor, based on what kind of variable mediates the relationship with distress, and that the intolerance to the ambiguity is a risk factor that busters distress.

Rank-dependent preferences, social network and crop insurance uptake: field experimental evidence from rural China

PurposeAgricultural insurance has become increasingly important to farmers' livelihood and production in rural China. Yet despite the enormous governmental subsidizing efforts, the insurance participation rate remains below expectations. This study revisits the linkage between farmers' risk attitudes and crop insurance utilization by providing a cross-cutting perspective such that the role of risk aversion is re-scrutinized in Chinese “kindred” village economies.Design/methodology/approachThe authors administrated a lottery-based multiple price list (MPL) experiment by recruiting rice farmers from 12 villages in Sichuan province in southwestern China. Using the experimental data, farmers' risk attitudes are assessed and coefficients of risk aversion are estimated within the rank-dependent expected utility (RDEU) framework by maximizing a structured likelihood function.FindingsThis study provides substantiating evidence that rice farmers in southwestern China exhibit relatively high risk aversion. The authors also provide suggestive evidence of the positive relationship between farmers' risk aversion and crop insurance utilization. In addition, findings reveal that kinship network has a negative effect on crop insurance utilization, such that farmers who are connected in higher degree of kinship network have lower likelihood of crop insurance utilization, which suggests that kinship network may be substitute for formal crop insurance. Result also demonstrates that the incentive effect of risk aversion on farmers' crop insurance participation manifests differently depending on the degree of kinship network in rural China.Originality/valueThis study provides a cross-cutting perspective by scrutinizing the effects of farmers' risk attitudes and kinship network on crop insurance participation in rural China, which has received relatively little attention in the literature. Conclusions on the effects of risk aversion on crop insurance participation have been mixed in previous studies. In addition, to the best of our knowledge, little has been done to explicitly examine the influence of social proximity and networks on farmers' insurance uptake. This study attempts to fill both gaps. This study provides new insights which might shed lights on the understanding of farmers' crop insurance participation in rural China.

Maximizing Relative Wealth Using Leverage: The Role of Risk Aversion

Investors can use leverage to increase the returns and profit of an investment. The so-called Kelly criterion is traditionally used to determine the optimal leverage factor for maximizing an investor’s absolute wealth. However, using the Kelly criterion may lead to too risky decisions for rational investors without log utility, rendering it not applicable for risk averse investors. Further, investor success is more often than not evaluated as the relative performance against a benchmark, making the case for maximizing relative wealth rather than absolute wealth. We propose a risk-adjusted Kelly criterion based on quadratic utility for maximizing the investors’ wealth relative to a generic reference. Our model enables us to derive the optimal leverage decision for rational investors seeking to maximize relative wealth given investor risk aversion, thereby allowing risk averse investors to benefit from leverage. Quadratic utility also enables optimizing of leverage independent of the returns-density-function assumption so that the skewness and kurtosis of asset returns do not violate the assumptions of the model. Our findings demonstrate the rationale for risk averse investors to use leverage in maximizing relative wealth. Our study provides useful understanding of relative wealth accumulation using leverage and the role of risk aversion.

The Role of Risk Aversion in Stochastic Differential Reinsurance Games

The Role of Risk Aversion in Stochastic Differential Reinsurance Games

Role of Risk Aversion in Price Postponement Under Supply Random Yield

Price postponement is an effective mechanism to hedge against the adverse effect of supply random yield. However, its effectiveness and the resulting production decisions have not been studied for risk-averse firms. In this paper, we investigate the impact of price postponement and risk aversion under supply yield risk. Specifically, we study a risk-averse monopoly firm’s production and pricing decisions under supply random yield with two distinct pricing schemes: (1) ex ante pricing in which the firm simultaneously makes the sales price and sourcing decisions before production takes place and (2) responsive pricing in which the pricing decision is postponed until after the production yield realization. We adopt conditional value at risk (CVaR) as the risk-aversion measurement and investigate the impact of the firm’s risk-aversion level on its optimal decisions and the corresponding profit. Among other results, we show that, for each pricing scheme, there exists a unique risk-aversion threshold under which the firm chooses not to produce. Interestingly, price postponement has no impact on the risk-aversion threshold as the cutoff values under both pricing schemes are the same. We further show that the value of CVaR improvement from responsive pricing may not be monotonic in the firm’s risk-aversion level. Consequently, our results indicate that, although price postponement induces operational flexibility by better matching demand with available supply, whether the firm should adopt responsive pricing needs to be carefully evaluated as the benefit may not justify the potential fixed cost associated with price postponement, especially for a highly risk-averse firm. In addition, we show that responsive pricing, even with its ex post revenue-maximization behavior, benefits the end-market consumers in equilibrium. Finally, we conduct extensive numerical studies to check and confirm the robustness of our results. This paper was accepted by Charles Corbett, operations management.

Consumer Vulnerability and Behavioral Biases

A wealth of evidence shows that individuals are biased and firms can often exploit consumers' behavioral biases in their contract designs. In this paper, we study how vulnerable biased individuals are to their own behavioral biases in market equilibrium, and focus on the role of risk aversion and intertemporal elasticity of substitution (IES). We measure consumer vulnerability by the percentage loss in a consumer's equilibrium certainty equivalent from a market with non-biased consumers to that with biased ones. We examine several important behavioral biases that have been extensively studied in the literature, including the impact of biased beliefs (either over- or under-confidence) in an insurance market, the impact of present bias and naivete about present bias in a dynamic model of credit contract design, the impact of projection bias about habit formation, and the impact of expectation-based loss aversion on an investor's portfolio choice. We show that consumer vulnerability to all four commonly studied behavioral biases has a non-monotonic relationship with risk aversion or IES. This is in striking contrast to the deviations in the equilibrium allocations from the rational benchmark, which are often monotonic to the risk aversion or IES. We also consider a setting of biased agents with Epstein-Zin preferences to isolate the effect of risk aversion from that of IES. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Do Farmers Value Insurance Against Extreme Droughts and Floods? Evidence from Odisha, India

Crop insurance provides farmers with financial support and coverage in the event of extreme natural disasters. Despite more than two decades of disseminating the knowledge in India, crop insurance adoption rates remain low with evidence of dis-adoption. This article assesses farm households’ willingness to insure their crops as well as ability to pay for an insurance product designed to help rural Indian farmers manage flood- and drought-associated risks. The objective of this study is to assess the determinants of farmers’ participation in market-based agricultural insurance living in coastal and rainfed areas prone to risky weather. It is hypothesized that crop insurance would lead to less risk-averse behaviour and more efficient use of farm resources. Using probit model, the study highlights several determinants of willingness to insure and empirically verify the role of risk aversion in insurance purchase decisions. The lottery-choice experiment has been applied by the author for evaluating risk attitudes of sample household. Empirical results suggest that as regards farmers’ risk preferences, risk aversion actually plays an important role even though not directly but in interactive terms with expected losses which, in turn, significantly influencing farmers’ willingness to purchase the insurance product. The study underlines significant influence of insurance history on future crop insurance choice decision. Farmers’ insurance purchase history can help insurance companies, in order to devise effective crop insurance programmes in the future. Similarly, the study also foregrounds the significant role of insured amount in insurance contracts, influencing farmers’ crop insurance purchase decision in both rainfed and irrigated regions. It can therefore help insurance companies to revise the contract items or reform the existing subsidies. Finally, the study goes on to recommend the importance of the knowledge of informal risk management strategies followed by farmers before offering them the formal insurance product and the necessity of the insurance companies in understanding the farmers’ behaviour while designing the insurance product.

Consumer Vulnerability and Behavioral Biases

A wealth of evidence shows that individuals are biased and firms can often exploit consumers' behavioral biases in their contract designs. In this paper, we study how vulnerable biased individuals are to their own behavioral biases in market equilibrium, and focus on the role of risk aversion and intertemporal elasticity of substitution (IES). We measure consumer vulnerability by the percentage loss in a consumer's equilibrium certainty equivalent from a market with non-biased consumers to that with biased ones. We examine several important behavioral biases that have been extensively studied in the literature, including the impact of biased beliefs (either over- or under-confidence) in an insurance market, the impact of present bias and naivete about present bias in a dynamic model of credit contract design, the impact of projection bias about habit formation, and the impact of expectation-based loss aversion on an investor's portfolio choice. We show that consumer vulnerability to all four commonly studied behavioral biases has a non-monotonic relationship with risk aversion or IES. This is in striking contrast to the deviations in the equilibrium allocations from the rational benchmark, which are often monotonic to the risk aversion or IES. We also consider a setting of biased agents with Epstein-Zin preferences to isolate the effect of risk aversion from that of IES.