Personal ruin versus corporate profit: why individual risk attitudes lessen economic outcomes

2012 ◽  
Vol 52 (1) ◽  
pp. 301
Author(s):  
Matthew B. Welsh ◽  
Stephen (Steve) H. Begg
Keyword(s):  
Prospect Theory ◽  
Utility Theory ◽  
Oil And Gas ◽  
Risk Tolerance ◽  
Petroleum Exploration ◽  
Individual Risk ◽  
Risk Averse ◽  
Risk Neutral ◽  
Corporate Risk ◽  
The Impact

Previous work on utility theory has highlighted value lost as a result of companies’ non-risk-neutral behaviour. Prospect theory, however, extends utility theory to describe how individuals make decisions under uncertainty. Key features include: use of decision weights rather than probabilities, and asymmetry between losses and gains, with losses weighted more heavily. Both effects impact on peoples’ risk tolerance (i.e., how risk averse or risk seeking they are). Given the petroleum industry’s reliance on decisions made under uncertainty, prospect theory can significantly impact on the value of decisions. This paper presents multiple studies highlighting the impact of prospect theory on decision value and, in particular, the changes in value resulting from differences between individual and company risk tolerances. Results indicate that prospect theory effects cause changes in risk tolerance, resulting in lost value compared to risk-neutral decisions and that this is strongest when probability of success is low—as is often the case in petroleum exploration. Differences between individual and corporate risk tolerances also impact value. The presented studies, however, demonstrate why it can benefit an individual to be risk averse even when their employer would prefer risk-neutrality, as this reduces the chance of personal ruin and increases personal expected value (EV). Finally, the implications for oil and gas decision makers are discussed. It is argued that corporate risk tolerances are, in fact, aggregated individual risk tolerances, which should be compared to ideal corporate risk tolerances calculated using the chance of ruin for a company with a particular portfolio of investments.

Risk Aversion and Unemployment in an Open Economy

2000 ◽  
Vol 49 (2) ◽  
Author(s):  
Pia Weiß
Keyword(s):  
Risk Aversion ◽  
Open Economy ◽  
Small Open Economy ◽  
Risk Behaviour ◽  
Terms Of Trade ◽  
Individual Risk ◽  
Risk Averse ◽  
Search Frictions ◽  
Long Run ◽  
The Impact

AbstractThe paper analyses the impact which risk aversion has on a small open economy characterised by search frictions on the labour market. It is shown that the long-run qualitative effects caused by a terms-of-trade shock are independent of individual risk behaviour. As far as quantitative aspects are concerned risk aversion always leads to higher equilibrium employment; however the increase in unemployment due to a price shock is the higher the more risk-averse individuals are.

Designing two-period decentralized service chain incentives with the consideration of customer acquisition and retention

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tian Wang ◽  
Yunan Duan ◽  
Yangyang Liang
Keyword(s):  
Principal Agent ◽  
Customer Acquisition ◽  
Risk Averse ◽  
Content Type ◽  
Service Chain ◽  
Incentive Model ◽  
Risk Neutral ◽  
Fixed Part ◽  
The Impact ◽  
Incentive Strategy

PurposeThe authors address a two-dimensional (both customer acquisition and retention) incentive in a decentralized service chain consisting of a risk-neutral brand and agent (or averse). Design/methodology/approachThe authors focus on the relationship between acquisition and retention, that is, retained customers (repeated purchases) are based on and come from the acquired (new) customers in the former period. The authors also design a two-period separate incentive on both dimensions.FindingsThe authors found that a targeted incentive strategy should be applied for achieving more revenue when the incentive intensities are relatively small. Otherwise, the brand needs to adjust the targeted incentive strategy into incentivizing the opposite dimension, particularly on acquisition. Under the optimal contract, the brand needs to be very careful with deciding the fixed part of the incentive salary and the incentive intensities on both dimensions. For example, the fixed salary initially decreases and then increases in the incentive intensities. For the optimal incentive policies, the brand should incentivize acquisition but outsource retention if the agent is risk-neutral. When the agent is becoming risk-averse, the brand should lower its incentive intensity as the risk degree and variances become larger. Interestingly, the brand may benefit from introducing risks.Originality/valueThe study contributes to the literature by considering the following points. First, the authors extend the principal-agent incentive model by considering two-period decisions of customer acquisition and retention. Second, based on the two-period principal-agent problem, the authors design separate incentive intensities on acquisition and retention, respectively. While, most of the literature focused on acquisition incentives. Third, different from other works focusing on either risk-neutral or risk-averse environments, the authors consider both and compare the cases of risk-neutral and risk-averse to analyze the impact of risk on the optimal decisions and the brand's expected profit.

The Impact of New Technologies on Nigeria's Oil Reserves

1993 ◽  
Vol 11 (5) ◽  
pp. 414-422
Author(s):  
Adebayo Aina
Keyword(s):  
Natural Gas ◽  
Oil And Gas ◽  
New Technologies ◽  
Three Dimensional ◽  
Petroleum Exploration ◽  
Seismic Survey ◽  
Oil Reserves ◽  
Technological Developments ◽  
Oil And Natural Gas ◽  
The Impact

Two key technological developments in petroleum exploration - three dimensional seismic survey (3-D Seismic) and integrated seismic interpretation workstations - have led to significant discoveries of oil and gas in the various Nigerian oil provinces where they have been introduced. These new technologies were introduced in Nigeria in the mid-1980s and have since resulted in significant additions to the country's proven crude oil and natural gas reserves.

scholarly journals A Prospect Theoretic Approach for Trust Management in IoT Networks under Manipulation Attacks

2020 ◽  
Author(s):  
Mehrdad Salimitari ◽  
Shameek Bhattacharjee ◽  
Mainak Chatterjee ◽  
Yaser Fallah
Keyword(s):  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Data Integrity ◽  
Expected Utility Theory ◽  
Trust Model ◽  
Aggregate Data ◽  
Risk Tolerance ◽  
Risk Attitudes ◽  
Theoretic Approach

<div>As Internet of Things (IoT) and Cyber-Physical systems become more ubiquitous in our daily lives, it necessitates the capability to measure the trustworthiness of the aggregate data from such systems to make fair decisions. However, the interpretation of trustworthiness is contextual and varies according to the risk tolerance attitude of the concerned application. In addition, there exist varying levels of uncertainty associated with an evidence upon which a trust model is built. Hence, the data integrity scoring mechanisms require some provisions to adapt to different risk attitudes and uncertainties.</div><div><br></div><div>In this paper, we propose a prospect theoretic framework for data integrity scoring that quantifies the trustworthiness of the collected data from IoT devices in the presence of adversaries who try to manipulate the data. In our proposed method, we consider an imperfect anomaly monitoring mechanism that tracks the transmitted data from each device and classifies the outcome (trustworthiness</div><div>of data) as not compromised, compromised, or undecided. These outcomes are conceptualized as a multinomial hypothesis of a Bayesian inference model with three parameters. These parameters are then used for calculating a utility value via prospect theory to evaluate</div><div>the reliability of the aggregate data at an IoT hub. In addition, to take into account different risk attitudes, we propose two types of fusion rule at IoT hub– optimistic and conservative.</div><div><br></div><div>Furthermore, we put forward asymmetric weighted moving average (AWMA) scheme to measure the trustworthiness of aggregate data in presence of On-Off attacks. The proposed framework is validated using extensive simulation experiments for both uniform and On-Off attacks. We show how trust scores vary under a variety of system factors like attack magnitude and inaccurate detection. In addition, we measure the trustworthiness of the aggregate data using the well-known expected utility theory and compare the results</div><div>with that obtained by prospect theory. The simulation results reveal that prospect theory quantifies trustworthiness of the aggregate data better than expected utility theory.</div>

scholarly journals CORPORATE RISK MANAGEMENT PRACTICES IN BOSNIA AND HERZEGOVINA COMPANIES

2017 ◽  
pp. 198-216
Keyword(s):  
Risk Management ◽  
Bosnia And Herzegovina ◽  
Management Practices ◽  
Cash Flows ◽  
Business Environment ◽  
Risk Tolerance ◽  
Corporate Risk Management ◽  
Modern Business ◽  
Corporate Risk ◽  
The Impact

Over the last few decades, corporate risk management has become a very important element of management to financial and non-financial companies. In the modern business environment every company is exposed to corporate risk. It can be said that the way to deal with the corporate risk has become a crucial competitive advantage for enterprises in all industry sectors. Reducing the impact of corporate risks such as financial risks, operational risks, strategic and hazardous risks, companies can reduce the volatility of cash flows, thus reducing the expected costs of financial difficulties and agency costs and increase the present value of expected future cash flows. Also, by reducing the volatility of cash flows company increases the likelihood of securing sufficient quantities of its own funds for planned investments, eliminating the need to cut profitable projects or bear the transaction costs of expensive external financing. The paper presents the results of research on the practice of corporate risk management in large non-financial companies in Bosnia and Herzegovina. Data on corporate risk management were collected using a questionnaire. The questionnaire was sent to 120 companies from Bosnia and Herzegovina, where 66 companies provided the required answers to the questions on the basis of which is ultimately formed variable risk that indicates the level of implementation of corporate risk management. Based on the study on the management of corporate risk in Bosnia and Herzegovina it can been concluded that most of the analyzed companies manage corporate risk, at least in certain segments. The largest number of companies actively controls only part of the overall exposure to corporate risk, or are considering the implementation of the complete process of corporate risk management. However, there are still a significant number of companies do not even manage corporate risk, and with them the risk management is primarily a result of occurred events. Although most of the observed companies monitor risks, it is worth pointing out that even 32% of the companies do not elucidate the risk tolerance, and even 45% of companies did not quantify the risks.

scholarly journals Investment Risk Profiling Utilizing Business Resource Slack

2011 ◽  
Vol 3 (8) ◽  
Author(s):  
Cyrus Safdari ◽  
Nancy J. Scannell
Keyword(s):  
Investment Decision ◽  
Risk Tolerance ◽  
Investment Risk ◽  
Risk Averse ◽  
Tripartite Model ◽  
Font Size ◽  
Risk Seeking ◽  
Risk Profiling ◽  
Risk Neutral ◽  
Resource Slack

<p class="MsoBlockText" style="margin: 0in 45.1pt 0pt 37.4pt;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-size: 11.0pt;"><span style="font-family: Times New Roman;">Financial investor classes are commonly depicted via a tripartite model that distinguishes among risk averse, risk neutral and risk seeking behaviors. This paper contributes to the literature by capturing the essence of risk tolerance in the context of a profit-maximizing firm&rsquo;s investment decision vis-&agrave;-vis the business&rsquo; resource slack. The paradigm introduced in this paper contextualizes risk profiling in a rigorous manner which should augment treatments relayed in standard principles of finance textbooks. This paper illustrates that it is the existence or absence of resource slack that influences, if not dictates, a business&rsquo; risk disposition.</span></span></p>

Product and After-Sales Maintenance Service Pricing Decisions in a Risk-Averse Supply Chain

2020 ◽  
Vol 37 (06) ◽  
pp. 2050031 ◽  
Author(s):  
Azmat Ullah ◽  
Wenpo Huang ◽  
Wei Jiang
Keyword(s):  
Demand Uncertainty ◽  
Risk Tolerance ◽  
Uncertain Demand ◽  
Risk Averse ◽  
Product Price ◽  
Repair Service ◽  
Tolerance Level ◽  
Special Cases ◽  
Risk Neutral ◽  
Free Replacement

After-sales service on a product could be a lucrative source of profits however it is notoriously difficult to manage due to uncertain demand from consumers, and its complex organization such as either to provide warranty or maintenance contract or repair service. This paper focuses on a problem where the manufacturer sells a repairable product while an agent provides after-sales service under uncertain demand. Due to demand volatility, either manufacturer or agent or both the players are risk-averse toward their decisions. The goal of this paper is to design various after-sales service strategies where the optimal price of repair or maintenance contract for the agent whereas the optimal product price for the manufacturer are explicitly determined such that the utility of both players can be maximized. Moreover, the impacts of risk-preference and demand uncertainty are investigated on both players’ price decisions, demand level, and their utility function. Also, the impacts of the agent’s warranty service on product price as well as repair and maintenance contract price are investigated. The interaction between the manufacturer and agent is performed under non-cooperative game where the manufacturer is the leader, and the agent is the follower. The analytical results show that when both players are risk-averse, they should adjust their prices with demand uncertainty and risk-tolerance level in order to maintain the demand stability and get more utility. Further, we consider some special cases where the risk-tolerance level of the manufacturer has an impact on the risk-neutral agent’s decisions whereas the risk-tolerance level of an agent does not have any impact on the risk-neutral manufacturer’s decisions. The analysis also shows that there is a significant impact of the agent’s free-replacement renewing warranty (FRRW) on repair and maintenance price decision if both players are risk-averse. A numerical example is presented to further illustrate the results and related issues.

Keeping Net Cash Flow Alive for a Petroleum Exploration Project: Risk Analysis Approach

2010 ◽  
Author(s):  
Hadi Belhaj ◽  
Mohamad Haroun ◽  
Terry Lay
Keyword(s):  
Risk Analysis ◽  
Cash Flow ◽  
Oil Recovery ◽  
Oil And Gas ◽  
Unit Price ◽  
Petroleum Exploration ◽  
Analysis Approach ◽  
Cost Category ◽  
Risk Parameters ◽  
The Impact

Meaningful risk analysis can be a tedious task to perform for many reasons, yet extremely rewarding. Lack of information, uncertainty surrounding risk parameters and their distributions, failure to define proper correlations relating some risk parameters, inappropriate selection of risk analysis criterion and misinterpretation of results are among these reasons. Risking net cash flow (NCF), through traditionally approaches can be a leap of faith. Rather, NCF should be treated with more subjectivity and in-depth understanding of all risk parameters and their interrelationships. Current practice of risk management in the petroleum industry adopts schemes that aim at separating risk into two main categories to understand, simplify, analyze, and evaluate existing contingencies. Commonly, the first category is referred to as subsurface risk that includes resource size, production rate, and access cost. Category two is surface risk that demonstrates total expenditure, facilities delivery, delays, performance, oil/gas prices, etc. Risk analysis of each is normally performed alone. Our study shows that separating risks for an investment with a singular outcome is misleading and extremely dangerous. In this paper, we introduce comprehensive criteria for handling risk associated with oil and gas exploration as well as development of mature reservoirs through EOR and IOR that involves large cash expenditures for; in-fill drilling, waterflooding, gas injection, and thermal and chemical treatment of heavy oil recovery. Basically, one or a combined uncertainty of these elements may create “business risk” that may cause “business impact”. The impact can be positive leading to “business opportunity” or negative leading to “business threat”. Also, instead of risking NCF using risk parameters like gross revenue that consists of hydrocarbon in-place and unit price of oil and gas, and net expenditure (CAPEX and OPEX) by simply defining their risk distributions and parameters, our approach breaks down each risk parameter to sub-parameters, then risk components and finally risk fragments. This produces a break-down model of risk analysis approach by including all parameters with no stage separation that avoids risk of poor assumptions. Hence, risk parameters are simplified by evaluating specific distributions. Case study involving one major Gulf States oil reservoirs is used to demonstrate the approach presented in this paper. Results show great improvement of results as compared to the traditionally used method.

scholarly journals Green Supply Chain Game Model and Contract Design: Risk Neutrality vs. Risk Aversion

2021 ◽  
Author(s):  
Jianhu Cai ◽  
Huazhen Lin ◽  
Xiaoqing Hu ◽  
Minyan Ping
Keyword(s):  
Supply Chain ◽  
Risk Aversion ◽  
Cost Sharing ◽  
Wholesale Price ◽  
Risk Tolerance ◽  
Retail Price ◽  
Green Supply Chain ◽  
Risk Averse ◽  
Equilibrium Solutions ◽  
Risk Neutral

Abstract This paper incorporates the players’ risk attitudes into a green supply chain (GSC) consisting of a supplier and a retailer. The supplier conducts production and determines the green level and wholesale price as a game leader, the retailer sells green products to consumers and determines the retail price as a follower. Equilibrium solutions are derived, and the influence of risk aversion on the GSC is examined. Our results show that, for the centralized GSC, risk aversion lowers the green level and the retail price; while for the decentralized GSC, risk aversion lowers the wholesale price and the retail price, but it may induce the supplier to increase the green level given a large risk tolerance of the supplier. Meanwhile, the risk-averse decentralized GSC may obtain more expected profit than the risk-neutral decentralized GSC. Furthermore, this paper designs a revenue-and-cost-sharing joint contract to coordinate the risk-neutral GSC, and such a contract can improve the risk-averse GSC under specific conditions.

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