Estimating risk preferences in the presence of bifurcated wealth dynamics: can we identify static risk aversion amidst dynamic risk responses?

2012 ◽  
Vol 40 (2) ◽  
pp. 361-377 ◽  
Author(s):  
T. J. Lybbert ◽  
D. R. Just ◽  
C. B. Barrett
Keyword(s):  
Risk Aversion ◽  
Risk Preferences ◽  
Dynamic Risk ◽  
Static Risk

AND, INJUSTICE FOR SOME CORRUPT EXCHANGE AND THE RISK-AVERSE OFFICIAL

2004 ◽  
Vol 2 (2) ◽  
Author(s):  
Gary E. Marche
Keyword(s):  
Law Enforcement ◽  
Theoretical Analysis ◽  
Risk Aversion ◽  
Organized Crime ◽  
Risk Preferences ◽  
Risk Averse ◽  
Enforcement Official ◽  
Optimal Law Enforcement

Although corruption and optimal law enforcement literature have addressed the effects of corruption, little has been done to analyze the decision to become corrupt. For example, little is known about risk preferences and how they might affect the nature of a corrupt exchange scheme. To answer this question, a theoretical analysis is developed that considers the noncoercive incentivea and circumstances necessary for a law enforcement official, assumed averse to criminal risk, to choose a corrupt exchange with organized crime that involves murder. Risk-aversion and the severity of the crime involved are shown to reduce the likelihood of detecting the corruption scheme and murder is shown to be optimal. Corruption schemes involving less risk averse offenders are analyzed and compared.

Risk Preferences and Incentives for Evidence Acquisition and Disclosure

2020 ◽  
Vol 36 (2) ◽  
pp. 314-342
Author(s):  
Erin Giffin ◽  
Erik Lillethun
Keyword(s):  
Decision Making ◽  
High Risk ◽  
Optimal Design ◽  
Risk Aversion ◽  
Risk Preferences ◽  
Decision Rules ◽  
Low Risk ◽  
Risk Averse ◽  
Good Decision ◽  
Legal Rules

Abstract Civil disputes feature parties with biased incentives acquiring evidence with costly effort. Evidence may then be revealed at trial or concealed to persuade a judge or jury. Using a persuasion game, we examine how a litigant’s risk preferences influence evidence acquisition incentives. We find that high risk aversion depresses equilibrium evidence acquisition. We then study the problem of designing legal rules to balance good decision making against the costs of acquisition. We characterize the optimal design, which differs from equilibrium decision rules. Notably, for very risk-averse litigants, the design is “over-incentivized” with stronger rewards and punishments than in equilibrium. We find similar results for various common legal rules, including admissibility of evidence and maximum awards. These results have implications for how rules could differentiate between high risk aversion types (e.g., individuals) and low risk aversion types (e.g., corporations) to improve evidence acquisition efficiency.

Financier Search and Boundaries of the Angel and VC Markets

2018 ◽  
Vol 43 (6) ◽  
pp. 1223-1249
Author(s):  
Gurupdesh Pandher
Keyword(s):  
Risk Aversion ◽  
Risk Preferences ◽  
Venture Capitalists ◽  
Entrepreneurial Finance ◽  
Initial Value ◽  
Agency Model ◽  
Investment Return ◽  
Investment Returns ◽  
Venture Funding ◽  
Funding Cycle

This paper studies how critical entrepreneurial finance outcomes such as the investment return and equity division are shaped by venture characteristics, financier risk preferences, and competitive searching. Our analysis uses a double-hazard agency model in which financiers determine the equity division to maximize the expected utility of their investment return while entrepreneurs search for the best deal. Model results provide new theoretical insights on the venture funding cycle, the coexistence of angels/venture capitalists (VCs) with heterogeneous risk aversion, and risk separation in the entrepreneurial finance market. The model predicts that financiers with higher funding capacity and advisory capabilities (e.g., VC firms) will prefer to fund at later stages as their expected investment return rises with the venture’s initial value and financier productivity. Competitive searching by entrepreneurs enables financiers with a diverse set of risk preferences to coexist profitably by reducing the advantage (disadvantage) of lower (higher) risk aversion financiers and making investment returns more similar. Further, the model shows the emergence of a risk separation cutoff beyond which only angels/VCs with lower levels of risk aversion can profitably fund riskier ventures.

Power Law with Exponential Cut‐off Utility

Metamorphosis ◽  
2014 ◽  
Vol 13 (1) ◽  
pp. 26-32
Author(s):  
Afreen Arif H. ◽  
T.P.M. Pakkala
Keyword(s):  
Risk Aversion ◽  
Utility Function ◽  
Power Law ◽  
Risk Preferences ◽  
Portfolio Allocation ◽  
Utility Functions ◽  
Relative Risk Aversion ◽  
Optimal Solutions ◽  
New Class ◽  
Exponential Power

Most of the utility functions studied earlier concentrated on properties of risk aversion. In this article, the authors have introduced a new class of utility function called the Power Law with Exponential Cut-off (PLEC) utility function, which exhibits all the absolute and relative risk aversion and risk loving preferences of individuals, under various conditions. It generalises and encompasses other systems of utility functions like that of exponential power. Certain properties of this utility function are discussed. Sensitivity analysis exhibits different portfolio allocations for various risk preferences. The analysis also shows that arbitrary risk preferences may lead to biased risk response estimates. Performance of PLEC utility function in portfolio allocation problem is demonstrated through numerical examples. This is evaluated through optimal solutions.

EXPRESS: Lay, professional, and artificial intelligence perspectives on risky medical decisions and COVID-19: How does the number of lives matter in clinical trials framed as gains versus losses?

2021 ◽  
pp. 174702182110520
Author(s):  
Sumitava Mukherjee ◽  
Divya Reji
Keyword(s):  
Artificial Intelligence ◽  
Clinical Trials ◽  
Risk Aversion ◽  
Risk Preferences ◽  
Medical Professionals ◽  
Medical Decisions ◽  
Risk Seeking ◽  
Intelligent Software ◽  
Number Of Patients ◽  
Loss Frame

Outcomes of clinical trials need to be communicated effectively to make decisions that save lives. We investigated whether framing can bias these decisions and if risk preferences shift depending on the number of patients. Hypothetical information about two medicines used in clinical trials having a sure or a risky outcome was presented in either a gain frame (people would be saved) or a loss frame (people would die). The number of patients who signed up for the clinical trials was manipulated in both frames in all the experiments. Using an unnamed disease, lay participants (experiment 1) and would-be medical professionals (experiment 2) were asked to choose which medicine they would have administered. For COVID-19, lay participants were asked which medicine should medical professionals (experiment 3), artificially intelligent software (experiment 4), and they themselves (experiment 5) favor to be administered. Broadly consistent with prospect theory, people were more risk-seeking in the loss frames than the gain frames. Risk-aversion in gain frames was sensitive to the number of lives with risk-neutrality at low magnitudes and risk-aversion at high magnitudes. In the loss frame, participants were mostly risk-seeking. This pattern was consistent across laypersons and medical professionals, further extended to preferences for choices that medical professionals and artificial intelligence programs should make in the context of COVID-19. These results underscore how medical decisions can be impacted by the number of lives at stake and reveal inconsistent risk preferences for clinical trials during a real pandemic.

scholarly journals Risk aversion and effort under an incentive pay scheme with multiplicative noise

2015 ◽  
Vol 3 (2) ◽  
pp. 130-144 ◽  
Author(s):  
Nikolay Zubanov
Keyword(s):  
Treatment Group ◽  
Risk Aversion ◽  
Multiplicative Noise ◽  
Risk Preferences ◽  
Individual Risk ◽  
Control Group ◽  
Incentive Pay ◽  
Risk Averse ◽  
Content Type ◽  
Piece Rate

Purpose – The purpose of this paper is to consider the influence of individual risk preferences on the effectiveness of incentive pay schemes, by examining the link between individual effort and risk aversion in situations where outcome uncertainty multiplies with effort. Such “multiplicative noise” situations are common, occurring whenever payment is awarded per success rather than per attempt. Design/methodology/approach – The paper develops a theoretical model which predicts a negative risk aversion-effort link under multiplicative noise without a performance target (PT), and a weaker negative link once the target is introduced. This model is then taken to the data from a lab experiment where participants were randomly assigned to a control group, which received fixed pay, and a treatment group, which received a piece rate awarded with a certain probability, with and without a PT. Risk aversion is measured with a menu of lottery choices offered at the end of the experiment. Findings – Compared to their peers in the control group, the more risk-averse participants in the treatment group put in progressively less effort in the absence of a PT. The introduction of a PT substantially weakens this negative risk aversion-effort link, so that there are no more significant differences in performance between the more and the less risk averse. Research limitations/implications – The paper’s findings speak to the empirical puzzles of incentive pay schemes backfiring and of the proliferation of PTs. The negative risk aversion-effort link may be one reason behind the failure of incentive schemes to deliver improved performance, whereas the weakening of this link may be one justification for the existence of PTs. Practical implications – In the multiplicative noise environments, managers should take their workers’ risk preferences into account when designing incentive pay schemes. A PT may be a useful motivational tool for the risk-averse workers who are more likely to under-perform. Originality/value – The multiplicative noise environment has been largely overlooked by the existing literature, yet it is common in practice. An example is the work of a sales agent who receives a bonus per sales which succeeds with a certain probability after each customer contact. This paper is one of the first to model, and test experimentally, worker performance in this environment.

Fretting about Modest Risks Is a Mistake

2019 ◽  
Vol 61 (3) ◽  
pp. 34-48
Author(s):  
Matthew Rabin ◽  
Max Bazerman
Keyword(s):  
Risk Aversion ◽  
Risk Preferences ◽  
Risk Averse

Managers often engage in risk-averse behavior, and economists, decision analysts, and managers treat risk aversion as a preference. In many cases, acting in a risk-averse manner is a mistake, but managers can correct this mistake with greater reflection. This article provides guidance on how individuals and organizations can move toward greater reflection and a more profitable aggregate portfolio of decisions. Inconsistency in risk preferences across decisions is a costly mistake for both individuals and for organizations.

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