This article argues that Lara Buchak’s risk-weighted expected utility theory fails to offer a true alternative to expected utility theory. Under commonly held assumptions about dynamic choice and the framing of decision problems, rational agents are guided by their attitudes to temporally extended courses of action. If so, REU theory makes approximately the same recommendations as expected utility theory. Being more permissive about dynamic choice or framing, however, undermines the theory’s claim to capturing a steady choice disposition in the (...) face of risk. I argue that this poses a challenge to alternatives to expected utility theory more generally. (shrink)
Critical race theorists and standpoint epistemologists argue that agents who are members of dominant social groups are often in a state of ignorance about the extent of their social dominance, where this ignorance is explained by these agents' membership in a socially dominant group (e.g., Mills 2007). To illustrate this claim bluntly, it is argued: 1) that many white men do not know the extent of their social dominance, 2) that they remain ignorant as to the extent of their dominant (...) social position even where this information is freely attainable, and 3) that this ignorance is due in part to the fact that they are white men. We argue that on Buchak's (2010, 2013) model of risk averse instrumental rationality, ignorance of one's privileges can be rational. This argument yields a new account of elite-group ignorance, why it may occur, and how it might be alleviated. (shrink)
A moderately risk averse person may turn down a 50/50 gamble that either results in her winning $200 or losing $100. Such behaviour seems rational if, for instance, the pain of losing $100 is felt more strongly than the joy of winning $200. The aim of this paper is to examine an influential argument that some have interpreted as showing that such moderate riskaversion is irrational. After presenting an axiomatic argument that I take to be the (...) strongest case for the claim that moderate riskaversion is irrational, I show that it essentially depends on an assumption that those who think that riskaversion can be rational should be skeptical of. Hence, I conclude that riskaversion need not be irrational. (shrink)
According to the orthodox treatment of risk preferences in decision theory, they are to be explained in terms of the agent's desires about concrete outcomes. The orthodoxy has been criticised both for conflating two types of attitudes and for committing agents to attitudes that do not seem rationally required. To avoid these problems, it has been suggested that an agent's attitudes to risk should be captured by a risk function that is independent of her utility and probability (...) functions. The main problem with that approach is that it suggests that attitudes to risk are wholly distinct from people's (non-instrumental) desires. To overcome this problem, we develop a framework where an agent's utility function is defined over chance propositions (i.e., propositions describing objective probability distributions) as well as ordinary (non-chance) ones, and argue that one should explain different risk attitudes in terms of different forms of the utility function over such propositions. (shrink)
Can it be rational to be risk-averse? It seems plausible that the answer is yes—that normative decision theory should accommodate riskaversion. But there is a seemingly compelling class of arguments against our most promising methods of doing so. These long-run arguments point out that, in practice, each decision an agent makes is just one in a very long sequence of such decisions. Given this form of dynamic choice situation, and the (Strong) Law of Large Numbers, they (...) conclude that those theories which accommodate riskaversion end up delivering the same verdicts as risk-neutral theories in nearly all practical cases. If so, why not just accept a simpler, risk-neutral theory? The resulting practical verdicts seem to be much the same. In this paper, I show that these arguments do not in fact condemn those risk-aversion-accommodating theories. Riskaversion can indeed survive the long run. (shrink)
Risk attitude is known to be a key determinant of various economic and financial choices. Behavioral studies that aim to evaluate the role of risk attitudes in contexts of this type, therefore, require tools for measuring individual risk tolerance. Recent developments in decision theory provide such tools. However, the methods available can be time consuming. As a result, some practitioners might have an incentive to prefer “fast and frugal” methods to clean but more costly methods. In this (...) article, we focus on a tractable procedure initially proposed by Holt and Laury (2002) to elicit risk attitude. We generalize this method to measure utility and riskaversion as follows. First, we allow measurement of probabilistic risk attitude through violations of expected utility due to probability weighting. Second, we use the outcome scale rather than the probability scale in the menu of choices. Third, we compare sure payoffs with lotteries instead of comparing non-degenerate lotteries. A within-subject experimental study illustrates the gains in tractability and bias minimization that can result from such an extension. (shrink)
We investigate risk attitudes when the underlying domain of payoffs is finite and the payoffs are, in general, not numerical. In such cases, the traditional notions of absolute risk attitudes, that are designed for convex domains of numerical payoffs, are not applicable. We introduce comparative notions of weak and strong risk attitudes that remain applicable. We examine how they are characterized within the rank-dependent utility model, thus including expected utility as a special case. In particular, we characterize (...) strong comparative riskaversion under rank-dependent utility. This is our main result. From this and other findings, we draw two novel conclusions. First, under expected utility, weak and strong comparative riskaversion are characterized by the same condition over finite domains. By contrast, such is not the case under non-expected utility. Second, under expected utility, weak comparative riskaversion is characterized by the same condition when the utility functions have finite range and when they have convex range. By contrast, such is not the case under non-expected utility. Thus, considering comparative riskaversion over finite domains leads to a better understanding of the divide between expected and non-expected utility, more generally, the structural properties of the main models of decision-making under risk. (shrink)
In the television show Deal or No Deal a contestant is endowed with a sealed box, which potentially contains a large monetary prize. In the course of the show the contestant learns more information about the distribution of possible monetary prizes inside her box. Consider two groups of contestants, who learned that the chances of their boxes containing a large prize are 20% and 80% correspondingly. Contestants in both groups receive qualitatively similar price offers for selling the content of their (...) boxes. If contestants are less risk averse when facing unlikely gains, the price offer is likely to be more frequently rejected in the first group than in the second group. However, the fraction of rejections is virtually identical across two groups. Thus, contestants appear to have identical risk attitudes over (large) gains of low and high probability. (shrink)
Various experimental procedures aimed at measuring individual riskaversion involve a list of pairs of alternative prospects. We first study the widely used method by Holt and Laury :1644–1655, 2002), for which we find that the removal of some items from the lists yields a systematic decrease in riskaversion and scrambles the ranking of individuals by riskaversion. This bias, that we call embedding bias, is quite distinct from other confounds that have been (...) previously observed in the use of the HL method. It may be related to empirical phenomena and theoretical developments where better prospects increase riskaversion. Nevertheless, we also find that the more recent elicitation method due to Abdellaoui et al., also based on lists but using only one and the same probability in the list, does not display any statistically significant bias when the corresponding items of the list are removed. Our results suggest that methods other than the popular HL one may be preferable for the measurement of riskaversion. (shrink)
Those who are risk averse with respect to money, and thus turn down some gambles with positive monetary expectations, are nevertheless often willing to accept bundles involving multiple such gambles. Therefore, it might seem that such people should become more willing to accept a risky but favourable gamble if they put it in context with the collection of gambles that they predict they will be faced with in the future. However, it turns out that when a risk averse (...) person adopts the long-term perspective, she faces a decision-problem that can be analysed as a noncooperative game between different "time-slices" of herself, where it is in the interest of each time-slice (given its prediction about other slices) to turn down the gamble with which it is faced. Hence, even if a risk averse but rational person manages to take the long-term perspective, she will, in the absence of what Hardin called "mutual coercion", end up in a situation analogous to the "tragedy of the commons". (shrink)
In a recent article entitled “Putting Risk in its Proper Place,” Eeckhoudt and Schlesinger (2006) established a theorem linking the sign of the n-th derivative of an agent’s utility function to her preferences among pairs of simple lotteries. We characterize these lotteries and show that, in a given pair, they only differ by their moments of order greater than or equal to n. When the n-th derivative of the utility function is positive (negative) and n is odd (even), the (...) agent prefers a lottery with higher (lower) n + 2p-th moments for p belonging to the set of positive integers. This result links the preference for disaggregation of risks across states of nature to the complete structure of moments preferred by mixed risk averse agents. It can be viewed as a generalization of a proposition appearing in Ekern (1980) which focused only on the differences in the n-th moments. (shrink)
We consider a situation where an individual is facing an uncertain situation, but may costly alter his knowledge of the uncertainties. We study in this context how riskaversion may modify the individual search behavior. We consider a one-armed bandit problem (where one arm is safe and the other is risky) and study how the agent riskaversion can change the sequence of arms selected. The main result is that when the utility function is more concave, (...) the agent has more chances to select the safe arm. We also discuss how search is affected by riskaversion. (shrink)
In this paper, we consider the composition of an optimal portfolio made of two dependent risky assets. The investor is first assumed to be a risk-averse expected utility maximizer, and we recover the existing conditions under which all these investors hold at least some percentage of their portfolio in one of the assets. Then, we assume that the decision maker is not only risk-averse, but also prudent and we obtain new minimum demand conditions as well as intuitively appealing (...) interpretations for them. Finally, we consider the general case of investor’s preferences exhibiting risk apportionment of any order and we derive the corresponding minimum demand conditions. As a byproduct, we obtain conditions such that an investor holds either a positive quantity of one of the assets or a proportion greater than 50 %. (shrink)
Diagnostic tests allow better informed medical decisions when there is uncertainty about a patient’s health status and, therefore, about the desirability to undertake treatment. This paper studies the relation between the expected value of diagnostic information and a patient's riskaversion. We show that the ex ante value of diagnostic information increases with riskaversion for diseases with low prevalence, but decreases with riskaversion for diseases with high prevalence. On the other hand, the (...) ex post value of diagnostic information always increases with the patient's degree of riskaversion. (shrink)
We call a decision maker risk averse for losses if that decision maker is risk averse with respect to lotteries having alternatives below a given reference alternative in their support. A two-person bargaining solution is called invariant under riskaversion for losses if the assigned outcome does not change after correcting for riskaversion for losses with this outcome as pair of reference levels, provided that the disagreement point only changes proportionally. We present an (...) axiomatic characterization of the Nash bargaining solution based on this condition, and we also provide a decision-theoretic characterization of the concept of riskaversion for losses. (shrink)
In this paper, we discuss the transition from secure employment to risky self-employment caused by a small increase in wealth. Building on the apportioning risk literature, we prove that the transition from secure employment to risky entrepreneurship is based on a measure of the difference between the strength of downside riskaversion and the strength of riskaversion. This result highlights the idea that using the behavioral approach of risky lotteries to study entrepreneurship can produce (...) different results from the traditional economic theory of entrepreneurship, which can have policy implications that must be considered with caution. (shrink)
Evidence of riskaversion in laboratory settings over small stakes leads to a priori implausible levels of riskaversion over large stakes under certain assumptions. One core assumption in statements of this calibration puzzle is that small-stakes riskaversion is observed over all levels of wealth, or over a â sufficiently largeâ range of wealth. Although this assumption is viewed as self-evident from the vast experimental literature showing riskaversion over laboratory stakes, (...) it actually requires that lab wealth be varied for a given subject as one evaluates the risk attitudes of the subject. We consider evidence from a simple design that tests this assumption, and find that the assumption is strikingly rejected for a large sample of subjects from a population of college students. We conclude that the implausible predictions that flow from these assumptions do not apply to one specialized population widely used to study economic behavior in laboratory experiments. (shrink)
Health security has become a popular way of justifying efforts to control catastrophic threats to public health. Unfortunately, there has been little analysis of the concept of health security, nor the relationship between health security and other potential aims of public health policy. In this paper I develop an account of health security as an aversion to risky policy options. I explore three reasons for thinking risk avoidance is a distinctly worthwhile aim of public health policy: that security (...) is intrinsically valuable, that it is necessary for social planning and that it is an appropriate response to decision-making in contexts of very limited information. Striking the right balance between securing and maximizing population health thus requires a substantive, and hitherto unrecognized, value judgment. Finally, I critically evaluate the current health security agenda in light of this new account of the concept and its relationship to the other aims of public health policy. (shrink)
I focus my discussion on the well-known Ellsberg paradox. I find good normative reasons for incorporating non-precise belief, as represented by sets of probabilities, in an Ellsberg decision model. This amounts to forgoing the completeness axiom of expected utility theory. Provided that probability sets are interpreted as genuinely indeterminate belief, such a model can moreover make the “Ellsberg choices” rationally permissible. Without some further element to the story, however, the model does not explain how an agent may come to have (...) unique preferences for each of the Ellsberg options. Levi holds that the extra element amounts to innocuous secondary “risk” or security considerations that are used to break ties when more than one option is rationally permissible. While I think a lexical choice rule of this kind is very plausible, I argue that it involves a greater break with xpected utility theory than mere violation of the ordering axiom. (shrink)
Fishburn and Vickson showed that, when applied to random alternatives with an equal mean, 3rd-degree and decreasing absolute riskaversion stochastic dominances represent equivalent rules. The present paper generalizes this result to higher degrees. Specifically, higher-degree stochastic dominance rules and common preference by all decision makers with decreasing higher-order absolute riskaversion are shown to coincide under appropriate constraints on the respective moments of the random variables to be compared.
For linear distribution classes, mean-variance and expected utility specifications have been shown in the literature to be fully compatible when studying the concepts of riskaversion, prudence, risk vulnerability and temperance. This paper shows that such compatibility does hold for the concept of standard riskaversion but not for the concepts of proper riskaversion and proper prudence.
Nash equilibria with identical supports are compared for bimatrix games that are different with respect to the riskaversion of player 2. For equilibria in 2× 2-bimatrix games and for equilibria with efficient supports in coordination games it is established for which cases increased riskaversion of player 2 benefits or hurts player 2.
Does CEO tolerance to risk affect a firm’s long-run sustainability? Using CEO insider debt holding, we show that CEO’s risk-aversion encourages immoral yet rational decisions of emitting more greenhouse gas thereby adversely affecting the firm’s long-run sustainability. Our result is robust to several endogeneity tests including a quasi-natural experiment. Our finding also suggest that to mitigate potential adverse reactions from stakeholders, carbon emitting firms with risk-averse CEOs tend to spend more on CSR activities. Much of the (...) heterogeneity in our results are attributed to companies with weaker governance, powerful CEOs, and operating in a competitive product market. Overall, contrary to conventional wisdom, CEO preference toward risk-aversion can often lead to unethical outcomes and especially appears to be a key determinant for firm-level carbon emissions. (shrink)
The question of whether females tend to act more ethically or risk-averse compared to males is an interesting ethical puzzle. Using a large sample of US firms over the 1992–2014 period, we investigate the effect that the gender of a chief executive officer has on earnings management using classification shifting. We find that the pre-Sarbanes–Oxley Act period was characterized by high levels of classification shifting by both female and male CEOs, but the magnitude of such practices is, surprisingly, significantly (...) higher in firms with female CEOs than in those with male CEOs. By contrast, our results suggest that following the passage of the punitive SOX Act, classification shifting by female CEOs declined significantly, whilst it remained pervasive in firms with male CEOs. This suggests that the observable differences in financial reporting behavior between male and female CEOs seem to be because female CEOs are more risk-averse, but not necessarily more ethically sensitive than their male counterparts are. The central tenets of our findings remain unchanged after several additional checks, including controlling for alternative earnings management techniques, corporate governance mechanisms, CEO and chief financial officer characteristics and propensity score-matching. (shrink)
According to Mark Rubinstein ‘In 1952, anticipating Kenneth Arrow and John Pratt by over a decade, he [de Finetti] formulated the notion of absolute riskaversion, used it in connection with risk premia for small bets, and discussed the special case of constant absolute riskaversion.’ The purpose of this note is to ascertain the extent to which this is true, and at the same time, to correct certain minor errors that appear in de Finetti's (...) work. (shrink)
Behavioral research has revealed how normal human cognitive processes can tend to lead us astray. But do these affect economic researchers, ourselves? This article explores the consequences of stereotyping and confirmation bias using a sample of published articles from the economics literature on gender and riskaversion. The results demonstrate that the supposedly ‘robust’ claim that ‘women are more risk averse than men’ is far less empirically supported than has been claimed. The questions of how these cognitive (...) biases arise and why they have such power are discussed, and methodological practices that may help to attenuate these biases are outlined. (shrink)
A central point of debate over environmental policies concerns how future costs and benefits should be assessed. The most commonly used method for assessing the value of future costs and benefits is economic discounting. One often-cited justification for discounting is uncertainty. More specifically, it is riskaversion coupled with the expectation that future prospects are more risky. In this paper I argue that there are at least two reasons for disputing the use of riskaversion as (...) a justification for discounting when dealing with longterm decisions, one technical and one ethical. Firstly, I argue that technically, it implies an inconsistency between theory and practice. And secondly, I argue that discounting for uncertainty relies on a form of individualism which, while reasonable in standard microeconomic theory where an agent chooses how to spread her own consumption over her own lifetime, is inappropriate in the context of intergenerational social decisions. (shrink)
The present note first discusses the concept of s-convex pain functions in decision theory. Then, the economic behavior of an agent with such a pain function is represented through the comparison of some recursive lotteries.
This paper extends the analysis of the data from the experiment of Hey et al. : 337–353, 2017), which was designed to test Proposition 2 of the theory of Manski : 155–173, 2017). I focus on how the subjects select the aspiration levels when they choose to satisfice, and try to find a better explanation for that story than that of Manski. I assume that the subjects are expected utility agents and that they think of the payoffs as having a (...) uniform risky distribution. I consider two special cases of the EU preferences: CRRA and CARA; and I combine these with two different stories for the stochastic specification of errors: beta and normal. To give a fair comparison in finding a better explanation of the individual behaviour, I also fit the data using Manski’s optimal strategy under both stochastic specifications. I estimate using maximum log likelihood. The estimation is done subject by subject. The results tell us that assuming that the subjects are EU agents and that they see the payoffs as uniformly distributed produces a better statistical explanation than that of Manski. That is the actual aspiration levels are statistically closer to the optimal aspiration levels assuming CRRA and CARA than those of Manski’s prediction. Interestingly, the subjects in the Hey et al. experiment appear to be risk loving when selecting their aspiration levels. (shrink)
The existing literature on savings, insurance, and portfolio choices under risk has revealed that quite often comparative statics results depend, among other things, upon the values of the coefficients of relative riskaversion and relative prudence. More specifically the benchmark values for these coefficients are, respectively, one and two. Recently, several papers investigated constraints on the higher degree extensions of the coefficients of relative riskaversion and of relative prudence. The present work provides a unified (...) approach to this question based on the concept of elementary correlation increasing transformations, allowing for a better understanding of changes in risk in the multiplicative case. (shrink)
Bernhard and Young (Journal of Academic Ethics, 7, 175-191, 2009) allege that a myth of confidentiality plagues research in North America because of the absence of statute-based legal protections and the requirements of some REBs to limit confidentiality to the extent permitted by law. In this commentary we describe statute-based protections for research confidentiality available in the United States, clarify the legal situation regarding research confidentiality in Canada, and explain that REBs that require confidentiality to be limited by law are (...) imposing a doctrine that is not required by the TCPS and may violate researchers’ academic freedom. The paper laments how excessive REB riskaversion and inaction by the granting agency Presidents has created a situation where some REBs are encouraging researchers to download research risks to research participants and forcing researchers to choose between exposing themselves to the prospect of going to jail to protect confidentiality, watering down their research objectives, or conducting vanilla research rather than engaging in controversial and/or sensitive areas of study. The paper urges the granting agency Presidents to seek legislative change to protect research participants who provide information that could cause them harm if their identity were to be revealed. (shrink)