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.

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.

Aggregate uncertainty, disappointment aversion and the business cycle

We investigate the eff ect of aggregate uncertainty shocks on real variables. More speci fically, we introduce a shock in the volatility of productivity in an RBC model with long-run volatility risk and preferences that exhibit generalised disappointment aversion. We find that, when combined with a negative productivity shock, a volatility shock leads to further decline in real variables, such as output, consumption, hours worked and investment. For instance, out of the 2% decrease in output as a result of both shocks, we attribute 0.25% to the e ffect of an increase in volatility. We also fi nd that this e ffect is the same as the one obtained in a model with Epstein-Zin- Weil preferences, but higher than that of a model with expected utility. Moreover, GDA preferences yield superior asset pricing results, when compared to both Epstein-Zin-Weil preferences and expected utility.

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 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.

Asymetric price adjustment and loss aversion

Ajuste assimétrico de preço é observado em diversos mercados, notavelmente varejo de gasolina: um aumento de custo é passado para os consumidores mais rápido do que uma redução. Eu desenvolvo um modelo de busca dos consumidores que gera essa predição sob aversão à perda. Uma fração dos consumidores ignora os preços no mercado e pode adquirir informação a um custo, o que permite que as firmas tenham lucro com dispersão de preços. Ajuste assimétrico de preço emerge se os consumidores são aversos a perdas em relação a um preço de referência. Custos mais altos tornam os consumidores mais dispostos a procurar, mas também diminui as chances de encontrar preços baixos, gerando uma relação custo-preço convexa.

Chile: early retirement, impatience and risk aversion

Includes bibliography

Conditioned food aversion to control poisoning by Ipomoea carnea subsp. fistulosa in goats

Para testar a técnica de aversão alimentar condicionada como método de controle para a intoxicação por I. carnea, foram realizados 3 experimentos administrando cloreto de lítio (LiCl) na dose de 175-200mg kg-1 após a ingestão da planta por caprinos. No primeiro, foram induzidos à aversão 10 caprinos que tinham o hábito de ingerir a planta e com sinais clínicos da intoxicação. Apesar da realização de diversos tratamentos aversivos, após os animais ingerirem a planta, a aversão não foi eficiente, demonstrando que a técnica não é eficiente em caprinos que já estão habituados a ingerir a planta. No segundo experimento, 14 caprinos foram adaptados a ingerir a planta na pastagem e, após ingerirem a planta a campo, foram induzidos à aversão com LiCl. Neste grupo, a aversão persistiu até o fim do Experimento, 2 anos e 8 meses após a aversão. Em outro experimento, 20 caprinos foram adaptados a consumir I. carnea e, em seguida, induzidos à aversão com LiCl. Esses animais foram transferidos para uma propriedade na Ilha de Marajó, onde foram realizadas 9 visitas com intervalos de 2-3 meses para verificar a duração da aversão. Após 2 anos de observações, nenhum animal voltou a ingerir a planta na pastagem e não foram observados casos de intoxicação, enquanto que, em 6 propriedades vizinhas, a doença foi observada com uma prevalência de até 60%. Esses resultados demonstram a eficiência da aversão alimentar condicionada para evitar a ingestão de I. carnea em caprinos recém adaptados a ingerir a planta, nas regiões invadidas por esta planta e nas condições naturais da Ilha de Marajó.

Methods of inducing conditioned food aversion to Baccharis coridifolia (mio-mio) in cattle

Foram realizados três experimentos para determinar a eficácia de vários métodos de aversão a Baccharis coridifolia em bovinos: administração oral forçada de 0,5g kg^-1 de peso vivo de B. coridifolia fresca; inalação forçada da fumaça proveniente da queima de B. coridifolia e esfregação da planta no focinho e na boca dos animais; e introdução dos animais em pastagens com baixa infestação por B. coridifolia. Os resultados demonstraram que os animais forçados a ingerir pequenas doses tornaram-se fortemente avertidos, quando introduzidos nos piquetes entre 23 a 26 horas após a aversão. Entretanto, bovinos introduzidos nos piquetes após 1 a 10 horas não foram totalmente avertidos. Inalação da fumaça de B. coridifolia e esfregação da planta no focinho e boca dos animais não foram eficientes para produzir aversão. A introdução de bovinos em piquetes com aproximadamente 1% de B. coridifolia foi eficiente quando os animais permaneceram cinco meses na área, mas não quando ficaram apenas 60 horas, pois os bovinos precisam de tempo para aprender a evitar a planta.

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

Baccharis coridifolia é uma planta tóxica que possui forte poder aversivo em ruminantes. Os objetivos deste trabalho foram induzir aversão condicionada a Ipomoea carnea avar. fistulos em caprinos utilizando B. coridifolia como agente aversivo e comparar a eficiência desta aversão com a aversão induzida por cloreto de lítio (LiCl). Treze cabras foram divididas em dois grupos: o Grupo 1 com seis cabras foi avertido com 175mg/kg de peso corporal (pc) de LiCl e o Grupo 2, com sete cabras, foi avertido com 0,25g/kg de pc de B. coridifolia seco. Todas as cabras foram avertidas no dia 1 logo após a ingestão de I.carnea. A aversão foi repetida nos dias 2, 3 e 7 nos caprinos que ingeriram qualquer quantidade de I. carnea, utilizando-se o mesmo procedimento do dia 1. Os caprinos de ambos os grupos foram desafiados nas baias nos dias 23 e 38 após o último dia da aversão e desafiados na pastagem nos dias 11, 15, 18, 20, 22, 25, 27 e 29 após o último dia da aversão. Posteriormente os caprinos foram desafiados a cada 15 dias na pastagem até o 330º dia após o último dia da aversão (7º dia). Duas cabras do Grupo 1 ingeriram I. carnea no primeiro dia do desafio na pastagem, quatro dias após o ultimo dia da aversão nas baias. Além disso, outra cabra do mesmo grupo reiniciou a ingestão da planta no 18º dia e outras duas no 20º dia. Uma cabra do Grupo 1 que nunca havia ingerido a planta após a aversão morreu no 55º dia. Uma cabra do Grupo 2 começou a ingerir I. carnea no primeiro dia de desafio na pastagem e uma segunda reiniciou o consumo da planta no 182º dia. No final do experimento no 330º as cinco cabras avertidas com B. coridifolia permaneciam sem ingerir a planta. Estes resultados sugerem que B. coridifolia ou algum princípio ativo dessa planta pode ser utilizado para induzir aversão condicionada a plantas tóxicas. A utilização de B. coridifolia como agente aversivo é aparentemente mais barato e mais fácil de ser utilizado do que o LiCl, o qual requer o uso de sonda oro-gástrica e pessoal qualificado para sua implementação.

Fear state induced by diazepam withdrawal may be due to the sensitization of the neural substrates of aversion in the dPAG

This work was supported by FAPESP (P.N. 04/02859-0)