Preference reversals for ambiguity aversion

This paper finds preference reversals in measurements of ambiguity aversion, even if psychological and informational circumstances are kept constant. The reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context-dependent weightings of attributes. We offer an explanation based on Sugden's random-reference theory, with different elicitation methods generating different random reference points. Then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion.

The effect of accountability on loss aversion.

This paper investigates the effect of accountability-the expectation on the side of the decision maker of having to justify his/her decisions to somebody else-on loss aversion. Loss aversion is commonly thought to be the strongest component of risk aversion. Accountability is found to reduce the bias of loss aversion. This effect is explained by the higher cognitive effort induced by accountability, which triggers a rational check on emotional reactions at the base of loss aversion, leading to a reduction of the latter. Connections to dual-processing models are discussed.

Enhanced neural response to anticipation, effort and consummation of reward and aversion during Bupropion treatment

Background We have previously shown that the selective serotonergic re-uptake inhibitor, citalopram, reduces the neural response to reward and aversion in healthy volunteers. We suggest that this inhibitory effect might underlie the emotional blunting reported by patients on these medications. Bupropion is a dopaminergic and noradrenergic re-uptake inhibitor and has been suggested to have more therapeutic effects on reward-related deficits. However, how bupropion affects the neural responses to reward and aversion is unclear. Methods 17 healthy volunteers (9 female, 8 male) received 7 days of bupropion (150 mg/day) and 7 days of placebo treatment, in a double-blind crossover design. Our functional Magnetic Resonance Imaging task consisted of 3 phases; an anticipatory phase (pleasant or unpleasant cue), an effort phase (button presses to achieve a pleasant taste or to avoid an unpleasant taste) and a consummatory phase (pleasant or unpleasant tastes). Volunteers also rated wanting, pleasantness and intensity of the tastes. Results Relative to placebo, bupropion increased activity during the anticipation phase in the ventral medial prefrontal cortex (vmPFC) and caudate. During the effort phase, bupropion increased activity in the vmPFC, striatum, dorsal anterior cingulate cortex and primary motor cortex. Bupropion also increased medial orbitofrontal cortex, amygdala and ventral striatum activity during the consummatory phase. Conclusions Our results are the first to show that bupropion can increase neural responses during the anticipation, effort and consummation of rewarding and aversive stimuli. This supports the notion that bupropion might be beneficial for depressed patients with reward-related deficits and blunted affect.

Conditioned taste aversion reduces fox depredation on model eggs on beaches

Context:  Conditioned taste aversion (CTA) is induced by an association of a food item with a negative experience, such as illness, which causes animals to avoid subsequent consumption of that particular food item. Inducing CTA may help reduce depredation rates of threatened fauna where predator population control is undesirable, impractical or unsuccessful.

Aims:  We investigated whether CTA could be induced among foxes (Vulpes vulpes) to model eggs which mimicked those of the threatened hooded plover (Thinornis rubricollis).

Methods:   Model eggs treated with a potential CTA-inducing chemical (sodium carbonate) and control eggs free of the agent were exposed to fox depredation for 28 days to simulate a hooded plover incubation period. To investigate whether CTA would persist in wild foxes, we implemented a part-time agent treatment (an initial 14 day exposure period of model eggs with the CTA agent followed by a second 14 day period when model eggs were free of the agent).

Key results:  Similar intervals to the first depredation event were found for all model eggs regardless of treatment. After the first depredation event by foxes, the rate and likelihood of fox depredation was significantly lower in treated eggs than in control eggs. The likelihood or rate of depredation across the three treatments did not differ between the first and second periods.

Conclusions: Our results suggest that during an exposure period of at least 28 days, CTA can be induced in wild foxes to eggs on beaches. Our results also suggest that 14 days may be insufficient time for wild foxes to develop a lasting CTA to familiar food items such as eggs.

Implications:  Treatment of eggs with a CTA-inducing chemical may present a viable alternative to traditional predator control techniques for hooded plovers, as well as other ground-nesting birds, provided that an extended exposure to the CTAinducing agent occurs.

Uncertainty aversion and the optmal choice of portfolio

In this paper we apply the theory of declsion making with expected utility and non-additive priors to the choice of optimal portfolio. This theory describes the behavior of a rational agent who i5 averse to pure 'uncertainty' (as well as, possibly, to 'risk'). We study the agent's optimal allocation of wealth between a safe and an uncertain asset. We show that there is a range of prices at which the agent neither buys not sells short the uncertain asset. In contrast the standard theory of expected utility predicts that there is exactly one such price. We also provide a definition of an increase in uncertainty aversion and show that it causes the range of prices to increase.

Estimating Relative Risk Aversion, Risk-Neutral and Real-World Densities using Brazilian Real Currency Options

Building Risk-Neutral Densities (RND) from options data can provide market-implied expectations about the future behavior of a financial variable. And market expectations on financial variables may influence macroeconomic policy decisions. It can be useful also for corporate and financial institutions decision making. This paper uses the Liu et all (2007) approach to estimate the option-implied Risk-neutral densities from the Brazilian Real/US Dollar exchange rate distribution. We then compare the RND with actual exchange rates, on a monthly basis, in order to estimate the relative risk-aversion of investors and also obtain a Real-world density for the exchange rate. We are the first to calculate relative risk-aversion and the option-implied Real World Density for an emerging market currency. Our empirical application uses a sample of Brazilian Real/US Dollar options traded at BM&F-Bovespa from 1999 to 2011. The RND is estimated using a Mixture of Two Log-Normals distribution and then the real-world density is obtained by means of the Liu et al. (2007) parametric risktransformations. The relative risk aversion is calculated for the full sample. Our estimated value of the relative risk aversion parameter is around 2.7, which is in line with other articles that have estimated this parameter for the Brazilian Economy, such as Araújo (2005) and Issler and Piqueira (2000). Our out-of-sample evaluation results showed that the RND has some ability to forecast the Brazilian Real exchange rate. Abe et all (2007) found also mixed results in the out-of-sample analysis of the RND forecast ability for exchange rate options. However, when we incorporate the risk aversion into RND in order to obtain a Real-world density, the out-of-sample performance improves substantially, with satisfactory results in both Kolmogorov and Berkowitz tests. Therefore, we would suggest not using the “pure” RND, but rather taking into account risk aversion in order to forecast the Brazilian Real exchange rate.

The role of consumer's risk aversion on price rigidity

This paper aims at contributing to the research agenda on the sources of price stickiness, showing that the adoption of nominal price rigidity may be an optimal firms' reaction to the consumers' behavior, even if firms have no adjustment costs. With regular broadly accepted assumptions on economic agents behavior, we show that firms' competition can lead to the adoption of sticky prices as an (sub-game perfect) equilibrium strategy. We introduce the concept of a consumption centers model economy in which there are several complete markets. Moreover, we weaken some traditional assumptions used in standard monetary policy models, by assuming that households have imperfect information about the ineflicient time-varying cost shocks faced by the firms, e.g. the ones regarding to inefficient equilibrium output leveIs under fiexible prices. Moreover, the timing of events are assumed in such a way that, at every period, consumers have access to the actual prices prevailing in the market only after choosing a particular consumption center. Since such choices under uncertainty may decrease the expected utilities of risk averse consumers, competitive firms adopt some degree of price stickiness in order to minimize the price uncertainty and fi attract more customers fi.'

Labor supply, risk aversion and economic refrom in China

Economic reform in China has created a small, but fast-growing private sector that has spurred rapid productivity growth. Growth of the private sector is predicated upon continued labor movements away from state-run industries and into private firms. This paper presents a theory of labor market sectoral choice demonstrating that three factors determine private sector labor supply-the difference in wages between the state and private sectors, private sector wage risk and risk aversion. Estimation of the model using survey data provides strong support for the theory. We find that the riskiness of private sector earnings has a greater effect in discouraging workers from taking jobs in private firms than the wage premi um has in attracting workers.

Asymmetric preferences in investment decisions in the Brazilian financial market

The main objective of this article is to test the hypothesis that utility preferences that incorporate asymmetric reactions between gains and losses generate better results than the classic Von Neumann-Morgenstern utility functions in the Brazilian market. The asymmetric behavior can be computed through the introduction of a disappointment (or loss) aversion coefficient in the classical expected utility function, which increases the impact of losses against gains. The results generated by both traditional and loss aversion utility functions are compared with real data from the Brazilian market regarding stock market participation in the investment portfolio of pension funds and individual investors.

Asymmetric auctions and risk aversion within independent private valoues

We study tournaments with many ex-ante asymmetric (heterogeneous) contestants as an independent-private-values all-pay auction. The asymmetry is either with respect to the distribution of valuations for the prize or the risk preferences. By characterizing equilibria in tnonotone strategies we show that tournaments \:vith man~y heterogenous contestants are qualitatively distinct. First, with two (or many ex-ante identical) participants, a contestant always exerts some effort with positive probability. In contrast, with many asymmetric participants, one 1night not exert any effort at all, even if there is a positive probability that he has the highest valuation among ali. Second, in tournan1ents with t'wo (o r n1any ex-ante h01nogenous) contestants, equilibrium effort densities are decreasing. This prediction is at odds with experimental evidence that shows the empírica! density might be increasing at high effort levels. V\.lith rnany heterogeneous contestants, however. the increasing bid density is consistent with an equilibrium behavior.