Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam

We conducted experiments in Vietnamese villages to determine the predictors of risk and time preferences. In villages with higher mean income, people are less loss-averse and more patient. Household income is correlated with patience but not with risk. We expand measurements of risk and time preferences beyond expected utility and exponential discounting, replacing those models with prospect theory and a three-parameter hyperbolic discounting model. Comparable risk parameter estimates have been found for Chinese farmers, using our method

Optimal funding and investment strategies in defined contribution pension plans under Epstein-Zin utility

A defined contribution pension plan allows consumption to be redistributed from the plan member’s working life to retirement in a manner that is consistent with the member’s personal preferences. The plan’s optimal funding and investment strategies therefore depend on the desired pattern of consumption over the lifetime of the member. We investigate these strategies under the assumption that the member has an Epstein-Zin utility function, which allows a separation between risk aversion and the elasticity of intertemporal substitution, and we also take into account the member’s human capital. We show that a stochastic lifestyling approach, with an initial high weight in equity-type investments and a gradual switch into bond-type investments as the retirement date approaches is an optimal investment strategy. In addition, the optimal contribution rate each year is not constant over the life of the plan but reflects trade-offs between the desire for current consumption, bequest and retirement savings motives at different stages in the life cycle, changes in human capital over the life cycle, and attitude to risk

Dimensionality of risk perception : factors affecting consumer understanding and evaluation of financial risk

This article describes two studies of the factors affecting consumer understanding of financial risk. The first study investigated factors affecting people's perception and comprehension of information about the risks related to retirement investments. First, we asked respondents to list possible risk factors related to investment in a pension plan. Then we obtained ratings of different factors (e.g., the perceived level of knowledge about an investment) that could affect perception of the risk of financial products and retirement investment decisions. Finally, we asked the subjects to rate 11 different descriptions presenting risk information about the same financial product. The risk information framing that received highest rating presented risk as variation between minimum and maximum values with an average in between. The second study demonstrated the risk framing that received highest ranking also prompted more stable risk preferences over a 3-month testing period in comparison to standard measures of risk aversion. Thus, the second study corroborated the importance of the findings in the first study and also indicated that, although people can exhibit stable risk preferences if we ask them the right questions, these preferences were very specific to the risk domain

Property rights, right to efficiency?

The assignment of property rights to incentivise risk-sharing in a principal-agent relationship is a recurrent theme of contract theory. This paper examines the incentive effects of property rights in a principal-agent relationship involving government as the principal, that is, the ownership concession model of publicprivate- partnership (PPP) procurement contracts for tollroads. Specifically, the paper investigates the effects of property rights on the agent’s preference for contract structure to manage risks and to exert performance effort; and the effects on both parties’ risk preferences when ownership transfer is being perceived as transferring accountability. Analysis of data collected through an online experiment surveying stakeholders who have been engaging in road contracts procured under the PPP model in 32 countries concludes that: (1) property rights offer the agent a protective shield against poor planning by the principal in the meantime gives rise to ex ante opportunism; (2) the agent’s reservation on ex post decision rights distorts allocative efficiency; and (3) revenue-sharing is a powerful incentive for non-revenueenhancing performance effort. Further investigation attests that incentive effects of property rights can be enhanced through equitable allocation of risks; nevertheless, ex post efficiency is debilitated by considerations of political sensitivity concerning toll pricing

Proposition structure in framed decision problems: A formal representation.

Framing effects, which may induce decision-makers to demonstrate preference description invariance violation for logically equivalent options varying in semantic emphasis, are an economically significant decision bias and an active area of research. Framing is an issue inter alia for the way in which options are presented in stated-choice studies where (often inadvertent) semantic emphasis may impact on preference responses. While research into both espoused preference effects and its cognitive substrate is highly active, interpretation and explanation of preference anomalies is beset by variation in the underlying structure of problems and latitude for decision-maker elaboration. A formal, general scheme for making transparent the parameter and proposition structure of framed decision stimuli is described. Interpretive and cognitive explanations for framing effects are reviewed. The formalism’s potential for describing extant, generating new stimulus tasks, detailing decision-maker task elaboration. The approach also provides a means of formalising stated-choice response stimuli and provides a metric of decision stimuli complexity. An immediate application is in the structuring of stated-choice test instruments

Risk Preferences as Determinants of Soil Conservation Decisions in Ethiopia

Soil degradation is one of the most serious environmental problems in the highlands of Ethiopia. The prevalence of traditional agricultural land use and the absence of appropriate resource management often result in the degradation of natural soil fertility. This has important implications for soil productivity, household food security, and poverty. Given the extreme vulnerability of farmers in this area, we hypothesized that farmers’ risk preferences might affect the sustainability of resource use. This study presents experimental results on the willingness of farmers to take risks and relates the subjective risk preferences to actual soil conservation decisions. The study looks at a random sample of 143 households with 597 farming plots. We found that a high degree of risk aversion significantly decreases the probability of adopting soil conservation. This implies that reducing farmers’ risk exposure could promote soil conservation practices and thus more sustainable natural resource management. This might be achieved by improving tenure security, promoting access to extension services and education, and developing off-farm activities that generate income.adoption, Ethiopia, risk preference, soil conservation

Improving the Risk Concept: A Revision of Arrow-Pratt Theory in the Context of Controlled Dynamic Stochastic Environments

In the literature on risk, one generally assume that uncertainty is uniformly distributed over the entire working horizon, when the absolute risk-aversion index is negative and constant. From this perspective, the risk is totally exogenous, and thus independent of endogenous risks. The traditional measures of risk-aversion are generally too weak for making comparisons between risky situations. This can be highlighted in concrete problems in finance and insurance, context for which the Arrow-Pratt measures of risk-aversion give ambiguous results (Ross 1981). We improve the Arrow-Pratt approach (1964, 1971a, 1971b), which takes into account only attitudes towards small exogenous risks, by integrating in the analysis potentially high endogenous risks that are under the control of the agent. Based on multiple theoretical and empirical arguments, this new approach offers an elegant study of the close relationship between behavior, attitude and perceived risk.Endogenous risk-aversion, adaptive risk management, optimal risk-aversion threshold, excessive risk-averse behavior, risk perception, changing risk behavior.

QUANTIFYING AND MANAGING RISK IN AGRICULTURE

Risk and Uncertainty,

Generalized asset pricing: Expected Downside Risk-Based Equilibrium Modelling

We introduce an equilibrium asset pricing model, which we build on the relationship between a novel risk measure, the Expected Downside Risk (EDR) and the expected return. On the one hand, our proposed risk measure uses a nonparametric approach that allows us to get rid of any assumption on the distribution of returns. On the other hand, our asset pricing model is based on loss-averse investors of Prospect Theory, through which we implement the risk-seeking behaviour of investors in a dynamic setting. By including EDR in our proposed model unrealistic assumptions of commonly used equilibrium models - such as the exclusion of risk-seeking or price-maker investors and the assumption of unlimited leverage opportunity for a unique interest rate - can be omitted. Therefore, we argue that based on more realistic assumptions our model is able to describe equilibrium expected returns with higher accuracy, which we support by empirical evidence as well.Comment: 55 pages, 15 figures, 1 table, 3 appandices, Econ. Model. (2015