the influence of probability on risky choice a parametric examination abstract the appeal of expected utility theory as a basis for a descriptive model of risky decision making has diminished as a result of empirical evidence which suggests that individuals do not behave in a manner consistent with the prescriptive tenets of eut in this paper we explore the influence of probability on risky choice by proposing and estimating a parametric model of risky decision making our results suggest that models which provide for probability transformations are most appropriate for the majority of subjects further we find that the transformation differs for most subjects depending upon whether the risky outcomes are gains or losses most subjects are considerably less sensitive to changes in mid range probability than is proposed by the expected utility model and risk seeking behavior over long shot odds is common

individual risk attitudes measurement determinants and behavioral consequences this paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects homes using a question asking people about their willingness to take risks in general we find that gender age height and parental background have an economically significant impact on willingness to take risks the experiment confirms the behavioral validity of this measure using paid lottery choices turning to other questions about risk attitudes in specific contexts we find similar results on the determinants of risk attitudes and also shed light on the deeper question of stability of risk attitudes across contexts we conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks occupational choice and smoking the question about risk taking in general generates the best all round predictor of risky behavior

risk preferences around the world we present results from a large scale international survey on risk preferences conducted in 53 countries in all countries we find on average an attitude of risk aversion in gains and of risk seeking in losses the degree of risk aversion shows significant cross country differences moreover risk attitudes in our sample depend not only on economic conditions but also on cultural factors as measured by the hofstede dimensions individualism and uncertainty avoidance the data may also serve as an interesting starting point for further research on cultural differences in behavioral economics data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1869 this paper was accepted by peter wakker decision analysis

defaults in bank loans to smes during the financial crisis we investigate the role of business collateral and personal guarantees alongside small and medium enterprise sme lending bank and loan characteristics macroeconomic conditions sectors and geographic locations while controlling for unobserved time effects in predicting default at the peak of the financial crisis first we find a positive relation between collateral and default and a negative relation between guarantees and default second we find a negative relation between the joint influence of collateral and high credit score and a positive relation between the joint influence of collateral and low credit score and default we also find a negative relation between the joint influence of guarantees and high credit score these findings are relevant for sme policies aimed at facilitating access to credit reducing the cost of borrowing and decreasing default risk management of banks and the application of theories of financial economics in the context of a financial crisis

framing and retirement age the gap between willingness to accept and willingness to pay summaryin a large online experiment we relate the retirement timing decision to the disparity between the willingness to accept wta and the willingness to pay wtp in the wtp treatment participants indicate the maximum amount of monthly benefits they are willing to give up to retire early in the wta treatment the minimum increase of monthly payments to delay retirement is elicited our results reveal that the framing of the decision problem strongly influences participants reservation price for early retirement the wta for early retirement is more than twice as high as the corresponding wtp using actual values from the german social security system as market prices we demonstrate that the presentation in a wta frame can induce early retirement in this frame the implicit probability of retiring early increases by 30 percentage points we further show that the disparity between wta and wtp is correlated with loss aversion repeating the analysis with data from a representative household survey german save panel we find similar results

corruption norm violation and decay in social capital the paper studies the link between corruption and social capital measured as trust using data from a lab experiment subjects play either a harassment bribery game or a strategically identical but differently framed ultimatum game followed by a trust game in a second experiment we elicit social appropriateness norm of actions in the bribery game and ultimatum game treatments our experimental design allows us to examine whether subjects who have been asked to pay a bribe are less likely to trust than those in an isomorphic role in the ultimatum game we also uncover the underlying mechanism behind any such behavioral spillover results suggest that a there is a negative spillover effect of corruption on trust and the effect increases with decrease in social appropriateness norm of the bribe demand b lower trust in the bribery game treatment is explained by lower expected return on trust c surprisingly for both the bribery and ultimatum game treatments social appropriateness norm violation engenders the decay in trust through its adverse effect on belief about trustworthiness

on representative social capital abstract this paper analyzes the behavior of subjects randomly drawn from the dutch population who reveal their capacity to provide and sustain social capital by their propensity to invest and reward investments in an economic experiment we find that heterogeneity in behavior is characterized by several asymmetries men the young and elderly and low educated individuals invest relatively less but reward significantly more investments the age effects are found to corroborate existing findings whereas those of gender and education do not higher expected levels of investments by others are found to have a positive and significant effect on own investments finally a laboratory experiment with student subjects is found to provide a lower bound of the population level of social capital

are women really more risk averse than men a re analysis of the literature using expanded methods while a substantial literature in economics and finance has concluded that women are more risk averse than men this conclusion merits investigation after briefly clarifying the difference between making generalizations about groups on the one hand and making valid inferences from samples on the other this essay suggests improvements to how economists communicate our research results supplementing findings of statistical significance with quantitative measures of both substantive difference cohen s d a measure in common use in non economics literatures and of substantive overlap the index of similarity newly proposed here adds important nuance to the discussion of sex differences these measures are computed from the data on men women and risk used in 35 scholarly works from economics finance and decision science the results are considerably more mixed and overlapping than would commonly be inferred from the broad claims made in the literature with standardized differences in means mostly amounting to considerably less than one standard deviation and the degree of overlap between male and female distributions generally exceeding 80 in addition studies that look at contextual influences suggest that these contribute importantly to observations of differences both between and within the sexes

formative experiences and portfolio choice evidence from the finnish great depression we trace the impact of formative experiences on portfolio choice plausibly exogenous variation in workers exposure to a depression allows us to identify the effects and a new estimation approach makes addressing wealth and income effects possible we find that adversely affected workers are less likely to invest in risky assets this result is robust to a number of control variables and it holds for individuals whose income employment and wealth were unaffected the effects travel through social networks individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments

effects of household shocks on risk preferences and loss aversion evidence from upland smallholders of south east asia avoiding risk in financial decisions is credited to be a key contributor to persistent poverty and poverty traps in spite of this the methods used to measure behaviour under risk rarely reflect a

income inequality and efficiency a decomposition approach and applications to china abstract this paper suggests a new interpretation for a decomposition of the theil inequality index when income can be expressed as multiplicative components applying the method to china we find that the impact of technical inefficiency on inter regional inequality has shown a declining trend

misperceived social norms women working outside the home in saudi arabia we show that the vast majority of young married men in saudi arabia privately support women working outside the home wwoh and substantially underestimate support by other similar men correcting these beliefs increases men s costly willingness to help their wives search for jobs months later wives of men whose beliefs were corrected are more likely to have applied and interviewed for a job outside the home in a recruitment experiment with a local company randomly informing women about actual support for wwoh leads them to switch from an at home temporary enumerator job to a higher paying outside the home version of the job

risk attitudes to low probability climate change risks wtp for flood insurance abstract natural disasters may increase in frequency and severity in the future as a result of climate change which is likely to have an impact on the demand for natural disaster insurance insights about individual risk beliefs and behavioural responses to changing risks are relevant for insurers as it allows them for example to estimate the demand for new insurance products that cover weather related damage this study elicits individual risk beliefs and the demand for low probability high impact flood insurance using the contingent valuation survey method among approximately 1000 homeowners in the dutch river delta this study is of practical relevance since currently flood insurance is not available in the netherlands while insurers have been considering to provide such insurance individuals generally do not behave in accordance with the expected utility model since a significant proportion of homeowners neglect the low probability flood risk the willingness to pay wtp of those individuals who demand flood insurance is on average considerably higher than the expected value of the flood risk they face moreover the wtp for flood insurance is less than proportionally related to increased flood probabilities that were presented to respondents in the questionnaire individuals follow a process of bayesian updating of flood probabilities since perceptions of flood risk are an important determinant of the wtp while objective risks derived from geographical characteristics influence the wtp to a lesser extent communication of baseline probabilities and changes in flood probabilities using risk ladders facilitate the comprehension of risk by respondents and has a considerable effect on the level of the wtp and its sensitivity to probability changes the results indicate that the current ex post public compensation scheme of flood damage lowers demand for private insurance

migrations risks and uncertainty a field experiment in china abstract we report data from the first incentivized artefactual field experiment conducted in china to understand whether chinese migrants differ from non migrants in terms of preferences regarding risk and uncertainty in various contexts we find that compared to non migrants migrants are significantly more likely to enter competitions when they expect competitive entries from others however migrants are not different from non migrants in risk and ambiguity preferences where strategic uncertainty is absent our results suggest that migration may be driven more by a stronger belief in one s chance of succeeding in an uncertain competitive environment than by differences risk attitudes related to state uncertainty

how do long shot outcomes affect preferences for climate change mitigation this article takes a fresh look at how public uncertainty influences willingness to pay wtp for climate change mitigation programs i elicit subjective distribution functions over future global mean temperatures and wtp for mitigation i find not surprisingly that subjects on average view climate change as a bad and the higher the expected temperature increase they perceive the more they are willing to pay for mitigation subjects are generally risk averse so that they are wtp more for mitigation programs when the outcome of the program is more certain the skew of the subjective climate change distribution also affects preferences so that aversion to catastrophic outcomes is an important component of wtp for mitigation i find that models that ignore skew are likely to underestimate the influence of uncertainty on willingness to pay for climate change mitigation

loan repayment performance in community development finance institutions in the uk this paper identifies the key institutional factors that influence loan loss rates in community development finance institutions in the uk traditional bank credit assessment puts the blame of poor loan performance largely on the borrower this is the first study of its kind to examine institutional characteristics of 16 cdfis in the uk and assess their influence on the loan loss rates the results show that 8 out of the 13 institutional characteristics examined significantly influence loan repayment performance although a vast body of literature supports the view that borrower characteristics are highly influential our results provide strong evidence to show that institutional characteristics are equally important and both factors need to be taken into account if loan repayment performance is to be improved

convergence in per capita health expenditures and health outcomes in the oecd countries our analysis of 19 organization for economic co operation and development oecd countries over the period 1972 to 2006 provides evidence of convergence in per capita health care expenditures for 17 countries while the us and to a lesser degree norway follow a different path a simple decomposition of per capita health expenditures reveals that the divergence of the us comes from the divergence of the ratio of health care expenditures to gross domestic product gdp component while norway s divergence is mainly caused by the labour productivity component interestingly our results suggest that convergence in per capita health expenditures among the 17 oecd countries does not lead to convergence in health outcomes finally we extend our analysis to examine convergence in various determinants of health expenditures

storm damage and risk preferences panel evidence from germany individuals risk preferences may change after experiencing external socio economic or natural shocks theoretical predictions and empirical studies suggest that risk taking may increase or decrease after experiencing shocks so far the empirical evidence is sparse especially when it comes to developed countries we contribute to this literature by investigating whether experiencing financial and health related damage caused by storms affects risk preferences of individuals in germany using unique panel data we find that household heads were more risk seeking after they experienced storm damage we do not find evidence of exposure to storm per se regardless of damage experience which suggests that household heads have to suffer damage for their risk preferences to be affected these results are robust across a battery of alternative model specifications and alternative storm damage measures magnitude of financial damage we rule out other potential explanations such as health related and economic shocks the self reported storm damage data is broadly confirmed by regional storm damage data provided by the insurance industry while we cannot identify the channels through which experiencing storm damage affects risk preferences from our data we suggest and discuss some potential channels the results may have important policy implications as risk preferences affect for instance individuals savings and investment behaviour adoption of self protection and self insurance strategies and technology adoption

measuring the effect of risk attitude on marketing behavior despite extensive study researchers continue to search for consistent and reliable measures of risk preferences to explain market behavior we find that a measure combining experiments rooted in expected utility theory and measures derived from surveys explains spot and contractual sales but does not exhibit substantially greater explanatory power than its underlying components survey based measures are generally more significant indicators of marketing choices but experimental measures reveal how risk attitudes vary over a range of probable outcomes which is important in light of increased commodity price volatility given recently identified limitations on the applicability of expected utility theory we suggest that researchers include survey methods to obtain low cost supplemental measures

the price setting behavior of banks an analysis of open end leverage certificates on the german market abstract this paper presents the first analysis of open end leverage certificates on the german market the major innovations of these certificates are twofold first issuers announce a price setting formula according to which they are willing to buy and sell the certificates over time second the product s lifetime is potentially endless our main findings are that the price setting formula is i designed to strongly favor the issuer and ii is consistent with the main outcome of the life cycle hypothesis for structured financial products stoimenov p a wilkens s 2005 are structured products fairly priced an analysis of the german market for equity linked instruments journal of banking and finance 29 2971 2993 iii this holds for different product features and also in the presence of issuers credit risk and jump risk in the underlying

direct evidence on risk attitudes and migration geographic mobility is important for the functioning of labor markets because it brings labor resources to where they can be most efficiently used it has long been hypothesized that individuals migration propensities depend on their attitudes towards risk but the empirical evidence to the extent that it exists has been indirect in this paper we use newly available data from the german socio economic panel to measure directly the relationship between migration propensities and attitudes towards risk we find that individuals who are more willing to take risks are more likely to migrate between labor markets in germany this result is robust to stratifying by age sex education national origin and a variety of other demographic characteristics as well as to the level of aggregation used to define geographic mobility the effect is substantial relative to the unconditional migration propensity and compared to the conventional determinants of migration we also find that being more willing to take risks is more important for the extensive than for the intensive margin of migration

occupational sorting of school graduates the role of economic preferences we relate risk attitudes and patience of young graduates from high school college and university measured around the time that they start their labor market career in a large representative survey to the riskiness and timing of earnings in the occupations they choose to work in we find a systematic positive and significant relation between willingness to take risks and measures of occupational earnings risks and employment risk that we derive from a large administrative data set patient individuals are significantly more likely to choose for occupations with a steep earnings profile individuals whose economic preferences are not well aligned with the riskiness and timing of earnings in their initial occupation are more likely to change to an occupation that better matches their economic preferences

investment horizon and the attractiveness of investment strategies a behavioral approach we analyze the attractiveness of investment strategies over a variety of investment horizons from the viewpoint of an investor with preferences described by cumulative prospect theory cpt currently the most prominent descriptive theory for decision making under uncertainty a bootstrap technique is applied using historical return data of 1926 2008 to allow for variety in investors preferences we conduct several sensitivity analyses and further provide robustness checks for the results in addition we analyze the attractiveness of the investment strategies based on a set of experimentally elicited preference parameters our study reveals that strategy attractiveness substantially depends on the investment horizon while for almost every preference parameter combination a bond strategy is preferred for the short run stocks show an outperformance for longer horizons portfolio insurance turns out to be attractive for almost every investment horizon interestingly we find probability weighting to be a driving factor for insurance strategies attractiveness

do women shy away from competition do men compete too much we examine whether men and women of the same ability differ in their selection into a competitive environment participants in a laboratory experiment solve a real task first under a noncompetitive piece rate and then a competitive tournament incentive scheme although there are no gender differences in performance men select the tournament twice as much as women when choosing their compensation scheme for the next performance while 73 percent of the men select the tournament only 35 percent of the women make this choice this gender gap in tournament entry is not explained by performance and factors such as risk and feedback aversion only playa negligible role instead the tournament entry gap is driven by men being more overconfident and by gender differences in preferences for performing in a competition the result is that women shy away from competition and men embrace it

retail banking and behavioral financial engineering the case of structured products abstract we apply cumulative prospect theory and hedonic framing to evaluate discount reverse convertibles drcs and reverse convertible bonds rcbs as important examples of structured products from a boundedly rational investor s point of view while common expected utility theory would also conclude that drcs and rcbs are of interest to investors with moderate return expectations and underestimated stock return volatility that theory would overestimate the market success of drcs and underestimate that of rcbs in comparison to a situation with bounded rationality hedonic framing and relatively low subjectively felt competence levels of investors are decisive for the demand for rcbs

investment analysis of autocallable contingent income securities autocallable contingent income securities autocalls have payouts contingent on the performance of an underlying asset and give investors an opportunity to earn high yields in a low interest environment the authors collected data on us issued autocalls and modeled a typical autocall under various assumptions finding that they are issued on underlying assets that display high volatility high prices and negative skewness incorporating stochastic volatility into the model explains some of the overpricing routinely reported in prior studies

the expected price of keeping up with the joneses abstract inflation expectations elicited in surveys have been found to exhibit large dispersion across individuals although several explanations have been proposed none fully explain this puzzle we explore in this paper a new behavioral factor social comparison using original survey data we find that respondents who feel they are falling behind compared to their peers report significantly and substantially higher inflation expectations we argue that this result is consistent with an experience based belief formation model in which those unable to keep up with the joneses overweight the high prices of aspiration goods they are unable to purchase

bubbles and financial professionals the efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates yet little is known about the contribution of financial professionals to price efficiency we run 116 experimental markets with 412 professionals and 502 students we find that professional markets with bubble drivers capital inflows or high initial capital supply are susceptible to bubbles although they are more efficient than student markets in mixed markets with students bubbles also occur but professionals act as price stabilizers we show that heterogeneous price beliefs drive overpricing especially in bubble prone market environments

microfinance spillovers a model of competition in informal credit markets with an application to indian villages despite widespread interest in the development of microfinance spillover effects on the non using population and redistributive issues remain largely unexplored i study a competition game between microfinance institutions mfis offering joint liability loans and moneylenders offering individual loans in presence of adverse selection i show that one unintended consequence of the entry of a microfinance sector in local credit markets can be to trigger an increase in the equilibrium informal interest rate because mfis tend to attract a disproportionately safe share of the borrower pool away from incumbent moneylenders the existence of such composition externality depends crucially on the size of the microfinance sector and the risk composition of the borrower pool the model predicts a non linearly increasing relationship between informal interest rates and mfis capacity in relatively safe credit markets and no relationship in risky villages i show evidence supporting these predictions using a first hand panel database that records all credit transactions over 8 years for a sample of about 1000 households living in indian villages with extensive space and time variation in the size of their microfinance sector

gender stock market participation and financial literacy abstract women participate less than men in the stock market and score lower on financial literacy we explore the link between this gender gap in stock market participation and financial literacy using survey data on a random sample of 1300 individuals that is representative of the swedish population we show that the estimated gender gap in stock market participation diminishes when we control for basic financial literacy essentially a measure of numeracy a gender gap in risk taking remains significant also when controlling for financial literacy

acting wife marriage market incentives and labor market investments do single women avoid career enhancing actions because these actions signal undesirable traits like ambition to the marriage market while married and unmarried female mba students perform similarly when their performance is unobserved by classmates on exams and problem sets unmarried women have lower participation grades in a field experiment single female students reported lower desired salaries and willingness to travel and work long hours on a real stakes placement questionnaire when they expected their classmates to see their preferences other groups responses were unaffected by peer observability a second experiment indicates the effects are driven by observability by single male peers

assessing farmers risk preferences and their determinants in a marginal upland area of vietnam a comparison of multiple elicitation techniques we examine the consistency of risk preference measures based on eight hypothetical elicitation methods and a lottery game applied to smallholder farmers in a marginal upland environment in vietnam using these measures we identify influencing factors of risk aversion via regression analysis whereby unlike previous studies we include several proxies of social capital such as social networks and norms data were collected from household heads and spouses separately in a random sample of 300 households although correlations between most of the various risk preference measures are all statistically highly significant most are weak on average respondents have a high degree of risk aversion and specific characteristics gender age idiosyncratic shocks education social norms network reliance with extended family and connections to local authorities are significant determinants of risk preferences across most elicitation methods whereas others the household s dependency ratio wealth and covariate shocks are significant in a few methods only the explanatory power of the models is limited indicating that other factors are likely to be of greater importance in determining risk preferences the results can help target safety nets encourage investments and lead to the development of more applicable methods for assessing risk preferences of smallholders in developing countries

are structured products fairly priced an analysis of the german market for equity linked instruments abstract based on a unique data set this paper examines the pricing of equity linked structured products in the german market the daily closing prices of a large variety of structured products are compared to theoretical values derived from the prices of options traded on the eurex european exchange for the majority of products the study reveals large implicit premiums charged by the issuing banks in the primary market a set of driving factors behind the issuers pricing policies is identified for example underlying and type of implicit derivative s for the secondary market the product life cycle is found to be an important pricing parameter

investing to cooperate theory and experiment we study theoretically and in a lab experiment investment decisions in environments where property rights are absent in our setting a player chooses an investment level before interacting repeatedly with a given set of agents the investment stochastically affects the payoffs of the game in every subsequent period we show that more volatile returns make investment more difficult in the absence of legal protection and might force the investor to invest more to guarantee cooperation experimental results are broadly consistent with the theoretical findings

life cycle saving insights from the perspective of bounded rationality this paper provides a new life cycle model that takes into account key elements of bounded rationality the paper shows that the model can account for patterns in the data that are hard to explain by the standard life cycle model among other patterns the model predicts that typically the young either hold no equity or their equity portfolio share is rather low and then increases over working life the analytical solution of the model demonstrates its high degree of tractability

risk aversion time preferences and out migration experimental evidence from ghana and indonesia abstract it has long been hypothesized that migrants and non migrants differ in their individual risk and time preferences due to a lack of reliable data on migrants preferences empirical evidence however is scarce therefore this paper has sought to advance research on preferences and migration decisions by using original household survey data from two developing countries that are both characterized by a longstanding tradition in regional migration in coastal communities in ghana and indonesia individual risk and time preferences have not only been elicited through survey questions but also through experimental tasks with real and relatively large monetary payoffs there is evidence that out migrants from both study regions are significantly less risk averse and have a lower time preference than non migrants overall the results indicate that the considered individual preferences are as important as employment status education or networks which have mainly been the focus of migration theories

rain emotions and voting for the status quo abstract do emotions affect the decision between change and the status quo we exploit exogenous variation in emotions caused by rain and analyze data on more than 870 000 municipal vote outcomes in switzerland to address this question the empirical tests are based on administrative ballot outcomes and individual postvote survey data we find that rain decreases the share of votes for political change our robustness checks suggest that this finding is not driven by changes in the composition of the electorate and changes in information acquisition in addition we provide evidence that rain might have altered the outcome of several high stake votes we discuss the psychological mechanism and document that rain reduces the willingness to take risks a pattern that is consistent with the observed reduction in the support for change

options and structured products in behavioral portfolios abstract options and structured products have no roles in mean variance portfolios but they have roles in behavioral portfolios behavioral portfolios are composed of mental account sub portfolios each associated with a goal such as retirement income or bequest investors optimize each mental account by finding the assets and asset allocation that maximizes the expected return of each mental account sub portfolio subject to the condition that the probability of failing to reach a preset threshold aspiration level not exceed a preset probability put options are useful in downside protection mental accounts whose goal is avoiding poverty whereas call options are useful in upside potential mental accounts whose goal is a shot at riches we also explore the roles in behavioral portfolios of option collars capital guaranteed notes and barrier range notes

income and consumption a micro semistructural analysis with pervasive heterogeneity we develop a model of consumption and income that allows for pervasive heterogeneity in the parameters of both processes introducing codependence between household income parameters and preference

incentives for dishonesty an experimental study with internal auditors we conduct an experiment with professional internal auditors and evaluate their performance and objectivity measured as the extent to which they truthfully report the performance of other participants in a real effort task in line with our hypotheses we find that incentive based compensation increases dishonest behavior competitive incentives lead to under reporting of other participants performance while collective incentives lead to over reporting of performance we replicate these results with a student sample in addition we find that moving from an environment with objective performance evaluation toward a peer evaluation scheme reduces performance among internal auditors but not among students jel c93 m42 m52

the gender effect in risky asset holdings abstract we study the relation between gender and stock holdings in finland a particularly gender equal country we show that it is crucial to control for risk aversion using a measure of subjective risk taking rather than measures derived from abstract gambles controls related to financial knowledge and resources also explain the gender difference the residual effect of the male gender on the conditional equity share after all appropriate controls is 3 percentage points and statistically significant the effect on stock market participation on the other hand is close to zero or negative so men contribute more to the nonparticipation puzzle conditional on covariates the gender difference mainly works through women s higher risk aversion which we find extends to finance professionals and wealthy private banking customers

risk aversion wealth and background risk we use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security we relate this measure to consumer s endowments and attributes and to measures of background risk and liquidity constraints we find that risk aversion is a decreasing function of the endowment thus rejecting cara preferences we estimate the elasticity of risk aversion to consumption at about 0 7 below the unitary value predicted by crra utility we also find that households attributes are of little help in predicting their degree of risk aversion which is characterized by massive unexplained heterogeneity we show that the consumer s environment affects risk aversion individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion consistent with recent theories of attitudes toward risk in the presence of uninsurable risks jel d1 d8

the impact of mobile financial services usage on microfinance delinquency abstractthis paper studies the impact of mobile financial systems usage on microcredit delinquency ratios in tunisia by using either a two part model or matching econometric procedures our large dataset contains all of the administrative registers that belong to the six branches of enda the incumbent institution leader in tunisia we find a significant reduction of 4 92 days of late repayment for an average user of mfs in an environment where 15 of loans have been paid late at least once we foresee a tremendous opportunity to improve the mfis repayment ratios and consequently provide microcredit customers with more financing for income generating activities

balance of power and the propensity of conflict we study the role of an imbalance in fighting strengths when players bargain in the shadow of conflict our experimental results suggest in a simple bargaining game with an exogenous mediation proposal the likelihood of conflict is independent of the balance of power if bargaining involves endogenous demand choices however the likelihood of conflict is higher if power is more imbalanced even though endogenous bargaining outcomes reflect the players unequal fighting strengths strategic uncertainty causes outcomes to be most efficient when power is balanced in turn the importance of exogenous mediation proposals depends on the balance of power

eliciting von neumann morgenstern utilities when probabilities are distorted or unknown this paper proposes a new method the gamble tradeoff method for eliciting utilities in decision under risk or uncertainty the elicitation of utilities to be used in the expected utility criterion turns out to be possible even if probabilities are ambiguous or unknown a disadvantage of the tradeoff method is that a few more questions usually must be asked to clients also the lotteries that are needed are somewhat more complex than in the certainty equivalent method or in the probability equivalent method the major advantage of the tradeoff method is its robustness against probability distortions and misconceptions which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation thus the tradeoff method retains full validity under prospect theory rank dependent utility and the combination of the two i e cumulative prospect theory the tradeoff method is tested for monetary outcomes and for outcomes describing life duration we find higher risk aversion for life duration but the tradeoff method elicits similar curvature of utility apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility

wage gains associated with height as a form of health human capital height is consulted as a latent indicator of early nutrition and lifetime health status height is observed to increase in recent decades in populations where per capita national income has increased and public health activities have grown height is determined by genetic make up and realized in part through satisfactory nutrition and health related care and conditions alternative instrumental variables iv are explored which proxy price and income constraints which are expected to influence the latter reproducible human capital investments in height i report ols and iv estimates of the partial effect of height on log hourly wages in recent national surveys from three countries ghana brazil and the united states i conclude that the human capital productivity effect of height estimated by parent education ivs in the us and ghana are many times larger than the ols estimates and in ghana and brazil the regional price ivs estimates also imply a substantially larger human capital wage effects of height compared with the ols estimates the ols estimates of height effects on wages are dominated by the genetic variation in height and appear to understate substantially the human capital returns to health and nutrition inputs which increase adult height this abstract was borrowed from another version of this item

can prospect theory be used to predict an investor s willingness to pay abstract cumulative prospect theory cpt is widely considered to be the most successful descriptive theory for decision making under risk and uncertainty sophisticated methods have been developed to reliably elicit cpt parameters on an individual basis the aim of this paper is to analyze whether such methods are suited to be applied in real world situations particularly in the context of investment counseling for retail investors specifically we examine whether cpt parameters elicited via standardized computer tools are successful in predicting an individual s preference for different structured financial products surprisingly we find only low predictive power of the elicited cpt parameters on the wtp using a second set of experiments we examine possible explanations for the low prediction quality overall we have to conclude that it is too much of a leap to draw conclusions about the attractiveness of complex financial products from cpt parameters elicited via simple lotteries

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

pricing effects when competitors arrive the case of discount certificates in germany this article investigates how overpricing of outstanding certificates also called master certificates changes when competing products that duplicate the features of master certificates are issued i argue that competition effects may be reverted and overpricing may increase rather than decrease after competitors arrive when retail investors fail to detect implications of credit risk differences on certificates values using difference in differences estimations on matched samples i find that overpricing of master certificates decreases after the competing products have been issued but only when the master issuer s credit risk is lower than that of the duplicate issuer while it increases when the credit risk difference is positive these findings are robust to controlling for retail investors demand in various ways thus the study indicates that retail investors failure to detect the value implications of issuers credit risk can undermine product competition

factor decomposition of cross country income inequality 1960 1990 abstract in this paper we present esteban s 1994 esteban j 1994 la desigualdad interregional en europa y en espana descripcion y analisis in esteban j m a vives x dirs crecimiento y convergencia regional en espana y en europa vol 2 instituto de analisis economico decomposition of the theil index of inequality over per capita incomes into the unweighted sum of the inequality indices of i the productivity per employed worker ii the employment rate iii the active over working age population rate and iv the working age over total population rate each of these factors clearly have different meanings for analysis as well as for policy we apply this factoral decomposition to a set of 120 countries we also contrast the empirical findings with the results obtained for the 23 oecd countries oecd labour force statistics several issues paris

tempus fugit time pressure in risky decisions we study the effects of time pressure on risky decisions for pure gain prospects pure loss prospects and mixed prospects involving both gains and losses in two experiments we find that time pressure has no effect on risk attitudes for gains but increases risk aversion for losses for mixed prospects subjects become simultaneously more loss averse and more gain seeking under time pressure depending on the framing of the prospects the results suggest the importance of aspiration levels and thus the overall probability to break even under time pressure we discuss the implications of our findings for decision making situations that involve time pressure

repayment performance in group based credit programs in bangladesh an empirical analysis abstract this paper analyzes the repayment rates of 128 credit groups belonging to three group based credit programs in bangladesh the association for social advancement asa the bangladesh rural advancement committee brac and the rangpur dinajpur rural service rdrs using tobit analysis specific tests are performed on the following hypothesized determinants group size size of loans degree of loan rationing enterprise mix within groups demographic characteristics social ties and status and occurrence of idiosyncratic shocks the paper concludes that if basic principles of prudential banking are adhered to repayment rates can be good even in poor and remote communities the important thing for financial institutions is to tailor services such that it becomes worthwhile for the poor to establish a profitable long term association in addition more freedom to members in the process of group formation is recommended

performance responses to competition across skill levels in rank order tournaments field evidence and implications for tournament design tournaments are widely used in the economy to organize production and innovation we study individual data on 2775 contestants in 755 software algorithm development contests with random assignment the performance response to added contestants varies nonmonotonically across contestants of different abilities precisely conforming to theoretical predictions most participants respond negatively whereas the highest skilled contestants respond positively in counterfactual simulations we interpret a number of tournament design policies number of competitors prize allocation and structure number of divisions open entry and assess their effectiveness in shaping optimal tournament outcomes for a designer

coase lecture the glass ceiling despite decades of progress women remain underrepresented in the upper part of the earnings distribution we review the recent research trying to explain this phenomenon after briefly revisiting gender differences in education we turn our attention to a body of work that has argued that gender differences in psychological attributes are holding back women s earnings we then review another active area of research focused on the challenges that women may face when trying to juggle competing demands on their time in the workplace and the home particularly when the home includes children we discuss recent work documenting women s greater demand for flexibility in the workplace as well as work measuring the labour market penalties associated with such demand for flexibility particularly in the higher paying occupations in the economy we highlight possible countervailing forces both at work and at home that may explain why these work family considerations may remain highly relevant to today s glass ceiling despite reduced time spent in non market work and a trend towards a more equal division of non market work between men and women finally we discuss the role that public policy and human resource practices may play in adding more cracks to the glass ceiling

portfolio insurance and prospect theory investors popularity and optimal design of capital protected financial products abstract portfolio insurance strategies are used on both the institutional and the retail side of the asset management industry while standard utility theory struggles to provide an explanation this study justifies the popularity of portfolio insurance strategies in a behavioral finance context we run monte carlo simulations as well as historical simulations for popular portfolio insurance strategies and benchmark strategies in order to evaluate the outcomes using cumulative prospect theory our simulation results indicate that most portfolio insurance strategies are the preferred investment strategy for a prospect theory investor moreover the analysis provides insights into how portfolio insurance products should be designed and structured to meet the preferences of prospect theory investors as accurately as possible

loan performance and race r carter hill recent studies find evidence of racial discrimination in mortgage markets although these studies explore loan approval rates for whites versus minorities they do not specifically consider loan performance either in the form of default rates or loan administration costs this study considers discrimination in the used car credit market where the collateral is not subject to location externalities collateral value and quality do not vary as much as in real estate and the loan terms are shorter we find administration costs and default rates are higher for minorities than for whites controlling for age income home ownership wealth occupation loan terms and geographic location jel k2 i introduction credit discrimination occurs whenever minorities are denied credit on the basis of race or are offered loans at terms different than the terms offered similarly situated whites 1 economists identify two types of discrimination preference taste based discrimination and information statistical based discrimination 2 the legal definition of discrimination makes no such distinction in their statistical studies munnell brown mceneaney and tootell 1996 carr and megbolugbe 1994 and gabriel and rosenthal 1991 find evidence of discrimination whereas most economic theorists such as becker 1993 and commentators such as brimelow 1993 and brimelow and spencer 1993 argue competition will greatly reduce if not eliminate discrimination in section iii we demonstrate why under regulation statistical discrimination may increase with increasing competition this anomalous result occurs because the legal definition does not distinguish between the two types of discrimination some economists implicitly assume credit markets are unregulated when considering the effect of competition on discrimination antidiscrimination regulation changes the effect of competition in unregulated markets taste based discrimination is unprofitable and increasing competition will reduce this form of discrimination if the industry s employees or white borrowers have a taste for discrimination competition will not necessarily eliminate taste based discrimination when regulation is binding and the economic foundation for statistical discrimination exists discrimination is profitable and increasing competition may increase discrimination the effect of regulation and competition on discrimination depends critically on the information basis for discrimination the relationship between loan performance and race therefore the appropriate empirical question is does a statistical basis for discrimination exist this question cannot be answered by loan approval studies rather it must be addressed by evaluating how loans perform after they are approved further the appropriate public policy issue is should society regulate statistical discrimination this article is an empirical inquiry into the relationship between race and loan performance we measure loan performance by estimating the same marginal default rates that lenders use to score credit applications and by the variables that have the most impact on loan administration costs we find that race matters regrettably in the fashion suggested by stereotypes in general minorities have higher default rates and contribute to higher administration costs in other words the foundation for statistical discrimination appears to exist section ii contains a review of the extant literature a theoretical model of credit scoring with both taste and statistical discrimination is contained in section iii the data are discussed in section iv and the empirical models are presented in section v ii literature as in arrow 1973 and becker 1957 an individual is said to have a preference or taste for discrimination if he is willing to pay a price or forgo income in order to practice discrimination

deal or no deal decision making under risk in a large payoff game show we examine the risky choices of contestants in the popular tv game show deal or no deal and related classroom experiments contrary to the traditional view of expected utility theory the choices can be explained in large part by previous outcomes experienced during the game risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes our results point to reference dependent choice theories such as prospect theory and suggest that path dependence is relevant even when the choice problems are simple and well defined and when large real monetary amounts are at stake

the effect of adolescent experience on labor market outcomes the case of height taller workers receive a wage premium net of differences in family background the disparity is similar in magnitude to the race and gender gaps we exploit variation in an individual s height over time to explore how height affects wages controlling for teen height essentially eliminates the effect of adult height on wages for white men the teen height premium is not explained by differences in resources or endowments the teen height premium is partially mediated through participation in high school sports and clubs we estimate the monetary benefits of a medical treatment for children that increases height

taking the initiative what characterizes leaders abstract taking the initiative is a crucial element of leadership and an important asset for many jobs we assess this element of leadership in a game in which it emerges spontaneously since people have a non obvious possibility to take the initiative we can show that leadership in this game correlates with real life activities associated with taking the initiative combining this game with other experimental games and with questionnaires we investigate the personality characteristics that entail leadership we find efficiency concerns and generosity to be important determinants of leadership leaders have an internal locus of control and are more patient than non leaders but they are not different from the non leaders with respect to risk attitude response time patterns and the results from the cognitive reflection test show that cognitive resources are relevant in the decision to lead

financial decision making are women really more risk averse 40 males 33 females gain gambling gain domain loss gambling loss domain a contextual frames b abstract gambling frames studies the application of experimental methods provided stronger control of the economic environment in which decisions were made we elicited data which call into question the prevalence of stereotypic risk attitudes in financial decision making first we find that the comparative risk propensity of male and female subjects is strongly dependent on the financial decision setting second and more important we observe no gender differences in risk propensity when subjects face contextual decisions since in practice financial decisions are always contextual our results suggest that the above gender stereotype may not reflect true male and female attitudes toward financial risks i gender specific risk behavior an experimental design our experiment was designed to examine gender specific risk propensity in decisions relevant for investors and managers table 1 gives an overview of the experimental design in the main treatment we implemented risky choices in the form of investment and insurance decisions choice behavior in this treatment henceforth called the context treatment directly measures the risk behavior of male and female subjects in contextual financial decisions we also ran a control treatment in which the same risky choices were presented as abstract gambling decisions this control treatment henceforth called the abstract treatment allows us to validate the risk behavior induced by our experimental procedure in the light of the above mentioned gambling evidence in the context treatment subjects were confronted with risky choices in two different decision contexts subjects first had to complete a series of investment decisions they were then presented with a series of identical choices this time however framed as insur1 wealth effects from income differences outside the laboratory may still affect risk behavior in our experiment they are controlled for in our model 2 experimental instructions are available in german from the authors or in english from our web page www wif ethz ch publikationen htm ance decisions each investment and insurance decision incorporated a choice between a risky lottery and a certain payoff with the series of choices implemented in the two frames we elicited our subjects certainty equivalents for the same four risky lotteries l1 l2 l3 l4 in both contexts we implemented two frames in the context treatment in order to measure the risk propensity of subjects toward both perceived gains and perceived losses in both frames all possible payoffs for each decision were positive in the investment frame these payoffs were also presented as gains while in the insurance frame the same payoffs were presented as losses relative to an initial endowment therefore elicited certainty equivalents in the investment frame measure subjects risk propensities in the gain domain while certainty equivalents in the insurance frame measure risk propensity in the loss domain if in contextual financial decisions female subjects are generally more risk averse than men our results should display ceteris paribus lower female certainty equivalents in both the investment and insurance frames 3 the four lotteries l1 l2 l3 and l4 each had two possible outcomes payoffs in swiss francs 1 sfr a 0 60 and their probabilities were 30 sfr 6 10 sfr 6 30 sfr 2 10 sfr 2 30 sfr 6 10 sfr 6 and 50 sfr 2 20 sfr 2 respectively 4 experimental evidence suggests that individual risk propensity will vary systematically between the gain and loss domain daniel kahneman and amos tversky 1979 383 vol 89 no 2 gender and economic transactions 3y16 my68 mp 383 friday dec 10 08 20 am lp aer my68 figure 1 differences in mean certainty equivalents ce between male and female subjects by frame note certainty equivalents and male female differences are measured in swiss francs in the abstract treatment we confronted a different group of subjects with exactly the same risky decisions as those in the main treatment however as mentioned before all choices in this control treatment were framed as abstract gambling decisions again two frames were implemented in the gaingambling and loss gambling frames we measured the risk attitudes of subjects toward gambles in the gain and loss domain respectively subjects in both treatments were told in advance that one of their choices would determine their experimental earnings further all subjects completed a post experimental questionnaire which yielded information on each subject s disposable income this information is necessary to exclude wealth effects due to income differences outside the laboratory as an explanation of gender specific choice behavior

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

consistency and heterogeneity of individual behavior under uncertainty by using graphical representations of simple portfolio choice problems we generate a very rich dataset to study behavior under uncertainty at the level of the individual subject we test the data for consistency with the maximization hypothesis and we estimate preferences using a two parameter utility function based on faruk gul 1991 this specification provides a good interpretation of the data at the individual level and can account for the highly heterogeneous behaviors observed in the laboratory the parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population

the impact of financial crises and tolerance for uncertainty abstract financial crises can have severe negative effects on investment one reason for this is that financial crises increase uncertainty increasing the real option value of delaying investment in this paper we show that the negative effect of crises on investment differs significantly across countries in countries with low tolerance for uncertainty the negative effect is strong the negative effect is absent in countries that are more tolerant of uncertainty these findings are similar across different types of financial crisis they vary as predicted across type of investor asset and industry and they are not driven by uncertainty averse countries adopting more rigid institutions

productivity growth technical progress and efficiency change in industrialized countries this paper analyzes productivity growth in 17 oecd countries over the period 1979 1988 a nonparametric programming method activity analysis is used to compute malmquist productivity indexes these are decomposed into two component measures namely technical change and efficiency change we find that u s productivity growth is slightly higher than average all of which is due to technical change japan s productivity growth is the highest in the sample with almost half due to efficiency change jel c43 d24 in this paper we apply recently developed

screening by the company you keep joint liability lending and the peer selection effect we look at an economic environment where borrowers have some information about the nature of each other s projects that lenders do not we show that joint liability lending contracts similar to those used by credit cooperatives and group lending schemes will induce endogenous peer selection in the formation of groups in a way that the instrument of joint liability can be used as a screening device to exploit this local information this can improve welfare and repayment rates if standard screening instruments such as collateral are unavailable

towards a performance measurement framework for community development finance institutions in the uk community development finance institutions cdfis are publicly funded organisations that provide small loans to people in financially underserved areas of the uk policy makers have repeatedly sought to understand and measure the performance of cdfis to ensure the efficient use of public funds but have struggled to identify an appropriate way of doing so in this article we empirically derive a framework that measures the performance of cdfis through an analysis of their stakeholder relationships based on qualitative data from 20 english cdfis we develop a typology of cdfis according to three dimensions organisational structure type of lending and type of market served following on from this we derive several propositions that consider how these dimensions relate to the financial and social performance of cdfis and provide the basis for a performance measurement framework

an empirical analysis of earnings and employment risk the mean and higher moments of the distribution of future income are crucial determinants of individual choices these moments are usually estimated in panel data from past income realizations inthis article we rely instead on subjective expectations available in the 1995 survey of household income and wealth a large random sample representative of italian households the survey elicits information on the distribution of future earnings and on the probability of unemployment analysis of this distribution helps us understand how individual uncertainty evolves over the life cycle and if attitudes toward risk affect occupational choices and income riskiness

temporal stability of risk attitudes and the impact of adverse shocks a panel data analysis from thailand and vietnam summary exogenous negative shocks and intrinsic risk attitudes are two important elements characterizing the vicious cycle of poverty associated with rural households in developing countries recent empirical studies suggest that adverse shocks a key driver of poverty can trigger substantial changes in the risk attitudes of poor people leading to decisions that perpetuate their lives in poverty although the temporal variability of risk attitudes is a controversial topic the literature advocating the temporal variability of risk attitudes suggests that covariate shocks such as natural disasters alter risk attitudes over time whereas idiosyncratic shocks show no such significant impact this paper aims to test the temporal stability of risk attitudes in rural households in thailand and vietnam to determine whether this pattern covariate shocks that affect risk attitudes and idiosyncratic shocks that do not can be confirmed for these households i use an exogenous measure of shocks to explain temporal variation in risk attitudes thus i estimate variation in consumption using a multilevel model in which variation in consumption at the individual level serves as a proxy for idiosyncratic shocks while variation in consumption at the aggregate level is used to measure covariate shocks my study finds temporal variability in risk attitudes that is driven by covariate shocks in vietnam and in contrast to past research by idiosyncratic shocks in thailand the results suggest that vietnamese respondents may be better in insuring idiosyncratic risks for example through safety nets while mutual insurance across individuals does not seem to work well in thailand in addition results indicate that the mutual insurance problem in thailand seems to increase in wealth the differences that i find between thailand and vietnam and across poverty types correspond to the difference in political systems and consequently the focus of socio political measures thailand s recent political volatility and the growing lack of social cohesion in thai society support these findings

loss aversion under prospect theory a parameter free measurement agrowing body of qualitative evidence shows that loss aversion a phenomenon formalized in prospect theory can explain a variety of field and experimental data quantifications of loss aversion are however hindered by the absence of a general preference based method to elicit the utility for gains and losses simultaneously this paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions thus it is the first to obtain a parameter free elicitation of prospect theory s utility function on the whole domain our method also provides an efficient way to elicit utility midpoints which are important in axiomatizations of utility several definitions of loss aversion have been put forward in the literature according to most definitions we find strong evidence of loss aversion at both the aggregate and the individual level the degree of loss aversion varies with the definition used which underlines the need for a commonly accepted definition of loss aversion