Does risk aversion or attraction depend on income? An experiment

Does risk attitude (aversion or attraction) vary with the level of the income at risk? About half of our subjects chose to insure all levels, whereas another half chose instead not to insure low levels, but to insure high levels.

Measuring risk aversion with lists: A new bias

Various experimental procedures aimed at measuring individual risk aversion involve alist of pairs of alternative prospects. We first study the widely used method by Holt andLaury (2002), for which we find that the removal of some items from the lists yields asystematic decrease in risk aversion. This bias is quite distinct from other confoundsthat have been previously observed in the use of the Holt and Laury method. It may berelated to empirical phenomena and theoretical developments where better prospectsincrease risk aversion. Nevertheless, we have also found that the more recent elicitationmethod due to Abdellaoui et al. (2011), also based on lists, does not display anystatistically significant bias when the corresponding items of the list are removed. Ourresults suggest that methods other than the popular Holt and Laury one may bepreferable for the measurement of risk aversion.

Risk aversion and embedding bias

In Selten (1967) ?Strategy Method,? the second mover in the game submits a complete strategy. This basic idea has been exported to nonstrategic experiments, where a participant reports a complete list of contingent decisions, one for each situation or state in a given sequence, out of which one and only one state, randomly selected, will be implemented.In general, the method raises the following concern. If S0 and S1 are two differentsequences of states, and state s is in both S0 and S1, would the participant make the same decision in state s when confronted with S0 as when confronted with S1? If not, the experimental results are suspect of suffering from an ?embedding bias.?We check for embedding biases in elicitation methods of Charles Holt and Susan Laury(Laury and Holt, 2000, and Holt and Laury, 2002), and of the present authors (Bosch-Dom?nech and Silvestre, 1999, 2002, 2006a, b) by appropriately chosen replications of the original experiments. We find no evidence of embedding bias in our work. But in Holt and Laury?s method participants tend to switch earlier to the riskier option when later pairs of lotteries are eliminated from the sequence, suggesting the presence of some embedding bias.

Experimental Cournot oligopoly and inequity aversion

This paper explores the role of inequity aversion as an explanation for observed behavior in experimental Cournot oligopolies. We show that inequity aversion can change the nature of the strategic interaction: quantities are strategic substitutes for sufficiently asymmetric output levels but strategic complements otherwise. We find that inequity aversion can explain why: (i) some experiments result in higher than Cournot-Nash production levels while others result in lower, (ii) collusion often occurs with only two players whereas with three or more players market outcomes are very close to Cournot-Nash, and (iii) players often achieve equal profits in asymmetric Cournot oligopoly.

Development of conditioned taste aversion to Mascagnia rigida in goats

The aim of this study was to determine whether goats could be averted from consuming Mascagnia rigida, a toxic plant found in the semiarid region of northeastern Brazil. Fourteen male goats not previously familiarized to M. rigida were randomly allocated to two treatment groups: control (treated with 5.5mL water orally by a drenching gun) and lithium group (treated with 100mg LiCl/kg body weight orally by a drenching gun). For conditioning, goats were allowed to feed on M. rigida leaves for 15 min, followed by LiCl or water administration. The time spent on eating M. rigida leaves was measured. The conditioning was repeated daily until the LiCl-treated goats stopped eating M. rigida. On the 10th, 17th, and 24th day after conditioning, extinction trials of the M. rigida aversion were performed in goats by using single-choice tests. There was no difference between the two treatment groups with respect to the consumption of M. rigida on the first day of aversion conditioning, however, controls ingested increasing amounts of the plant on consecutive conditioning days. On the second day, five out of the seven goats in the lithium group did not eat the leaves, but on the third day, all the goats in the lithium group did not ingest M. rigida. This aversion persisted throughout all evaluated days. This indicates that goats can be easily conditioned by using lithium chloride to avoid eating M. rigida temporarily.

Conditioned food aversion to Ipomoea carnea var. fistulosa induced by Baccharis coridifolia in goats

Baccharis coridifolia is a plant that induces strong conditioned food aversion in ruminants. This research aimed to induce a conditioned food aversion to Ipomoea carnea var. fistulosa in goats, using B. coridifolia as an aversive agent, and to compare the aversion induced by this plant with the aversion induced by lithium chloride (LiCl). Thirteen goats were allotted into two groups: Group 1 with six goats was averted with 175mg/kg of body weight of LiCl and Group 2 with seven goats was averted with 0,25g/kg of bw of dried B. coridifolia. All goats were averted on day 1 after the ingestion of I. carnea. The aversion procedure with LiCl or B. coridifolia in goats from Groups 1 and 2, respectively, was repeated in those goats that again consumed the plant during tests on days 2, 3, and 7. The goats of both groups were challenged in pens on 23 and 38 days after the last day of aversion and challenged in the pasture on days 11, 15, 18, 20, 22, 25, 27 and 29 after the last day of aversion. After this period goats were challenged every 15 days on pasture until the 330º day after the last day of aversion (7th day). Two goats from Group 1 ingested I. carnea on the first day of the pasture challenge, 4 days after the last day of aversive conditioning in the pen. In addition, another goat in Group 1 started to consume the plant on day 18, and other two goats ate it on day 20. One goat in Group 1 that had never eaten I. carnea died on day 155. One goat from Group 2 started to ingest I. carnea on the first day of the pasture challenge, and a second goat started to consume this plant on day 182. At the end of the experiment, on day 330, the other five goats averted with B. coridifolia remained averted. These results suggest that B. coridifolia or an active compound from the plant could be used to induce aversion to toxic plants. Using B. coridifolia would be cheaper and, particularly in flocks with large number of animals, possibly easier than using LiCl, which requires the use of oral gavage and qualified personnel for its implementation.

Incest aversion : the evolutionary roots of individual regulation

Den evolutionära förklaringen till den allmänt utbredda incestaversionen, dvs. motviljan för sex med nära släktingar, försöker besvara såväl frågan om varför incestaversionen gynnats i det naturliga urvalet som frågan om hur denna aversion regleras på individuell nivå. Eftersom inavlade barn har en försämrad biologisk duglighet än andra barn, medför kostnaderna av denna icke-optimala reproduktion ett selektionstryck mot inavel. I en serie studier visade vi att eftersom kvinnor i allmänhet satsar mer biologiska resurser på sina barn än vad män gör, känner kvinnor starkare incestaversion än män och eftersom det endast är fertila kvinnor som riskerar satsa resurser i en inavlad avkomma har även fertila kvinnor högre incestaversion än icke-fertila kvinnor. Vi visade också att de biologiska kostnaderna av inavel inte begränsas till enbart de individer som har incest. Eftersom alla våra biologiska släktingar sannolikt delar våra alleler speglar incestaversionen även de biologiska kostnader som incest mellan våra släktingar medför åt oss. Den psykologiska mekanism med vilken incestsituationer bedöms har hittills varit okänd. I våra studier testades teorin om självreflekterande empati. Enligt den teorin bedöms sådana situationer emotionellt genom att man själv föreställer sig ha sex med motsvarande släkting och känslan som väcks i denna process ger därefter emotionell information till bedömningen av andras incest. I tre delstudier fann vi att självreflektion var positivt associerat med styrkan av aversion gentemot andras incest, vilket stöder teorin om självreflekterande empati.

A Survey Measure of Risk Aversion

We Use Survey Data on the Well-Being of Individuals to Measure Attitude Toward Risk. Risk Neutrality Cannot Be Rejected by the Data.

Risk Aversion, Intertemporal Substitution, and Option Pricing

This paper develops a general stochastic framework and an equilibrium asset pricing model that make clear how attitudes towards intertemporal substitution and risk matter for option pricing. In particular, we show under which statistical conditions option pricing formulas are not preference-free, in other words, when preferences are not hidden in the stock and bond prices as they are in the standard Black and Scholes (BS) or Hull and White (HW) pricing formulas. The dependence of option prices on preference parameters comes from several instantaneous causality effects such as the so-called leverage effect. We also emphasize that the most standard asset pricing models (CAPM for the stock and BS or HW preference-free option pricing) are valid under the same stochastic setting (typically the absence of leverage effect), regardless of preference parameter values. Even though we propose a general non-preference-free option pricing formula, we always keep in mind that the BS formula is dominant both as a theoretical reference model and as a tool for practitioners. Another contribution of the paper is to characterize why the BS formula is such a benchmark. We show that, as soon as we are ready to accept a basic property of option prices, namely their homogeneity of degree one with respect to the pair formed by the underlying stock price and the strike price, the necessary statistical hypotheses for homogeneity provide BS-shaped option prices in equilibrium. This BS-shaped option-pricing formula allows us to derive interesting characterizations of the volatility smile, that is, the pattern of BS implicit volatilities as a function of the option moneyness. First, the asymmetry of the smile is shown to be equivalent to a particular form of asymmetry of the equivalent martingale measure. Second, this asymmetry appears precisely when there is either a premium on an instantaneous interest rate risk or on a generalized leverage effect or both, in other words, whenever the option pricing formula is not preference-free. Therefore, the main conclusion of our analysis for practitioners should be that an asymmetric smile is indicative of the relevance of preference parameters to price options.

Aversion Analysis

In this paper : a) the consumer’s problem is studied over two periods, the second one involving S states, and the consumer being endowed with S+1 incomes and having access to N financial assets; b) the consumer is then representable by a continuously differentiable system of demands, commodity demands, asset demands and desirabilities of incomes (the S+1 Lagrange multiplier of the S+1 constraints); c) the multipliers can be transformed into subjective Arrow prices; d) the effects of the various incomes on these Arrow prices decompose into a compensation effect (an Antonelli matrix) and a wealth effect; e) the Antonelli matrix has rank S-N, the dimension of incompleteness, if the consumer can financially adjust himself when facing income shocks; f) the matrix has rank S, if not; g) in the first case, the matrix represents a residual aversion; in the second case, a fundamental aversion; the difference between them is an aversion to illiquidity; this last relation corresponds to the Drèze-Modigliani decomposition (1972); h) the fundamental aversion decomposes also into an aversion to impatience and a risk aversion; i) the above decompositions span a third decomposition; if there exists a sure asset (to be defined, the usual definition being too specific), the fundamental aversion admits a three-component decomposition, an aversion to impatience, a residual aversion and an aversion to the illiquidity of risky assets; j) the formulas of the corresponding financial premiums are also presented.

Risk Aversion in Inventory Management

Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing strategies. In each case, we characterize the optimal policy for various measures of risk that have been commonly used in the finance literature. In particular, we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies. Computational results demonstrate the importance of this approach not only to risk-averse decision makers, but also to risk-neutral decision makers with limited information on the demand distribution.

Business cycle asymmetries: Loss aversion, sticky prices, and wages

In this chapter, the Smets-Wouters (2003) New Kenesian model is reformulated by introducing the loss aversion utility function developed in chapter two. The purpose of this is to understand how asymmetric real business cycles are linked to asymmetric behavior of agents in a price and wage rigidities set up. The simulations of the model reveal not only that the loss aversion in consumption and leisure is a good mechanism channel for explaining business cycle asymmetries, but also is a good mechanism channel for explaining asymmetric adjustment of prices and wages. Therefore the existence of asymmetries in Phillips Curve. Moreover, loss aversion makes downward rigidities in prices and wages stronger and also reproduces a more severe and persistent fall of the employment. All in all, this model generates asymmetrical real business cycles, asymmetric price and wage adjustment as well as hysteresis.

A DSGE model with loss aversion in consumption and leisure: an explanation for business cycles asymmetries

In this chapter, an asymmetric DSGE model is built in order to account for asymmetries in business cycles. One of the most important contributions of this work is the construction of a general utility function which nests loss aversion, risk aversion and habits formation by means of a smooth transition function. The main idea behind this asymmetric utility function is that under recession the agents over-smooth consumption and leisure choices in order to prevent a huge deviation of them from the reference level of the utility; while under boom, the agents simply smooth consumption and leisure, but trying to be as far as possible from the reference level of utility. The simulations of this model by means of Perturbations Method show that it is possible to reproduce asymmetrical business cycles where recession (on shock) are stronger than booms and booms are more long-lasting than recession. One additional and unexpected result is a downward stickiness displayed by real wages. As a consequence of this, there is a more persistent fall in employment in recession than in boom. Thus, the model reproduces not only asymmetrical business cycles but also real stickiness and hysteresis.