scholarly journals Risk-Intolerant but Risk-Taking—Towards a Better Understanding of Inconsistent Survey Responses of the Euro Area Households

2020 ◽  
Vol 12 (17) ◽  
pp. 6912
Author(s):  
Katarzyna Kochaniak ◽  
Paweł Ulman
Keyword(s):  
Risk Aversion ◽  
Financial Institutions ◽  
Euro Area ◽  
Risk Tolerance ◽  
High Income ◽  
Policy Implications ◽  
Risk Averse ◽  
Risky Assets ◽  
Inconsistent Information ◽  
University Degree

The sustainable development of the EU internal market for retail financial services is based on the rules of ‘suitability’, ‘know your client’, and ‘know your product’. The rules ensure that financial institutions (including banks) offer retail clients only products and services that are adequate to their purposes and preferences, including risk tolerance. Our study, however, concerns households for which the above rules are not valid, since they declare risk aversion and possess risky assets. According to the European Union Markets in Financial Instruments Directive and Regulation (MiFID II and MiFIR), the inconsistent information they provide within survey questions should classify them to more compound suitability assessment procedures. In the study, we use nationally representative data for 16 euro area countries from the second wave of the Eurosystem Household Finance and Consumption Survey. Using logit regression, we identify sets of socio-demographic and socio-economic characteristics conducive to the possession of risky assets by risk-averse households in individual countries. To assess their similarity, we use the hierarchical taxonomic method with Ward’s formula. The results of the study showed that risky assets were primarily possessed by risk-averse households that were characterised by high income, including from self-employment, and reference persons having a university degree and at least 55 years of age. The significance of their other characteristics was mainly shaped at the national level. The clear similarity of sets of the characteristics was confirmed only for a few pairs of countries. The information inconsistency that may result from erroneous self-assessments of being risk-averse was recognised in all countries and most often concerned high-income households with reference persons being males with a university degree. In 11 countries, the reason for this inconsistency could also be the inadequacy of assets held, also among senior households. The results provide insights for practitioners and policy. Identification of households providing inconsistent information to financial institutions, with the recognition of its reasons based on easily verifiable characteristics, may prove helpful in suitability assessments. The results confirming the similarity of household profiles requiring special attention between countries may be useful for entities operating cross-border. Due to the collection of information on risk aversion based on the single question self-classification method, conclusions regarding the restrictions of its use should also be considered relevant. In turn, policy implications may relate to consumer protection, since significant fractions of risk-averse households indeed participate in risky assets. Moreover, in selected countries, the risk-averse senior households were recognised as susceptible to making wrong investment decisions.

EFFECT OF OWNERSHIP STRUCTURE ON PERFORMANCE OF FINANCIAL INSTITUTIONS

2017 ◽  
Vol 2 (7) ◽  
pp. 48
Author(s):  
Fredrick Kiprop Lagat ◽  
Dr. Joel Tenai
Keyword(s):  
Financial Institutions ◽  
Ownership Structure ◽  
Positive Relationship ◽  
Target Population ◽  
Risk Tolerance ◽  
Policy Implications ◽  
Risk Monitoring ◽  
Industry Performance ◽  
Relationship Performance ◽  
Different Characteristics

Purpose: The purpose of the study was to examine the effect of ownership structure on performance of financial institutions.Methodology: The study used explanatory research design. The study used stratified random sampling to select respondents from target population comprising of managers of 46 commercial banks, 52 Micro Finance institutions (MFIs) and 200 SACCOs and a sample size of 239 respondents obtained. Data was collected using questionnaires. Descriptive statistics was presented, while inferential statistics was done using Pearson product moment correlation.Results: Risk monitoring [r = .206, p<.05] had a positive relationship performance of financial institutions. The more there was risk monitoring the higher the performance of financial institutions. A proper risk monitoring practices was used to ensure that risks are in line with financial institution's management goals in order to uncover mistakes at early stages. The risk monitoring had positive relationship on performance of financial institutions (P<0.05). The null hypothesis (HO4) stating that there is no significant effect of risk monitoring on the performance of financial institutions was rejectedUnique contribution to theory, practice and policy: The Central Bank of Kenya and Sacco’s Regulatory Authorities as regulators should make considerations due to the complexity of the financial sector nowadays makes it necessary before any policy analysis should rely upon different indicators and mainly upon those that reflect the whole reality of the industry performance and explicitly consider and carefully impose some regulations that consider different characteristics of ownership structure of financial institutions and the level of risk tolerance. The policy implications might be different across different types of financial institutions. Consider establish effective and efficient risk analysis mechanisms that will assist financial institutions ascertain their risk earlier.

scholarly journals Short‐term investments and indices of risk

2020 ◽  
Vol 15 (3) ◽  
pp. 891-921
Author(s):  
Yuval Heller ◽  
Amnon Schreiber
Keyword(s):  
Risk Aversion ◽  
Absolute Risk ◽  
Risk Index ◽  
Decision Makers ◽  
Decision Problems ◽  
Risk Averse ◽  
Short Term ◽  
Risky Assets ◽  
Absolute Risk Aversion ◽  
Constant Absolute Risk Aversion

We study various decision problems regarding short‐term investments in risky assets whose returns evolve continuously in time. We show that in each problem, all risk‐averse decision makers have the same (problem‐dependent) ranking over short‐term risky assets. Moreover, in each problem, the ranking is represented by the same risk index as in the case of constant absolute risk aversion utility agents and normally distributed risky assets.

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.

Eliciting Risk Preferences and Elasticity of Substitution

2020 ◽  
Vol 17 (4) ◽  
pp. 314-329
Author(s):  
Johan Burgaard ◽  
Mogens Steffensen
Keyword(s):  
Risk Aversion ◽  
Discount Rate ◽  
Predictive Power ◽  
Recursive Utility ◽  
Risk Averse ◽  
Indirect Utility ◽  
Consistent Estimation ◽  
On Certainty ◽  
Certainty Equivalents ◽  
Elasticity Of Intertemporal Substitution

Risk aversion and elasticity of intertemporal substitution (EIS) are separated via the celebrated recursive utility building on certainty equivalents of indirect utility. Based on an alternative separation method, we formulate a questionnaire for simultaneous and consistent estimation of risk aversion, subjective discount rate, and EIS. From a representative group of 1,153 respondents, we estimate parameters for these preferences and their variability within the population. Risk aversion and the subjective discount rate are found to be in the orders of 2 and 0, respectively, not diverging far away from results from other studies. Our estimate of EIS in the order of 10 is larger than often reported. Background variables like age and income have little predictive power for the three estimates. Only gender has a significant influence on risk aversion in the usually perceived direction that females are more risk-averse than males. Using individual estimates of preference parameters, we find covariance between preferences toward risk and EIS. We present the background reasoning on objectives, the questionnaire, a statistical analysis of the results, and economic interpretations of these, including relations to the literature.

scholarly journals Market-based instruments for risk-averse farmers: rubber agroforest conservation in Jambi Province, Indonesia

2016 ◽  
Vol 22 (2) ◽  
pp. 133-155 ◽  
Author(s):  
Utkur Djanibekov ◽  
Grace B. Villamor
Keyword(s):  
Income Inequality ◽  
Risk Aversion ◽  
Real Options ◽  
Risk Averse ◽  
Variance Model ◽  
Income Uncertainty ◽  
Real Options Approach ◽  
Pigovian Taxes ◽  
Rubber Agroforest ◽  
Mean Variance

AbstractThis paper investigates the effectiveness of different market-based instruments (MBIs), such as eco-certification premiums, carbon payments, Pigovian taxes and their combination, to address the conversion of agroforests to monoculture systems and subsequent effects on incomes of risk-averse farmers under income uncertainty in Indonesia. For these, the authors develop a farm-level dynamic mean-variance model combined with a real options approach. Findings show that the conservation of agroforest is responsive to the risk-aversion level of farmers: the greater the level of risk aversion, the greater is the conserved area of agroforest. However, for all risk-averse farmers, additional incentives in the form of MBIs are still needed to prevent conversion of agroforest over the years, and only the combination of MBIs can achieve this target. Implementing fixed MBIs also contributes to stabilizing farmers’ incomes and reducing income risks. Consequently, the combined MBIs increase incomes and reduce income inequality between hardly and extremely risk-averse farmers.

scholarly journals OPTIMAL OUTCOME SHARING WITH A CONSORTIUM OF CONTRACTORS

2015 ◽  
Vol 22 (5) ◽  
pp. 655-665 ◽  
Author(s):  
S. Mahdi HOSSEINIAN ◽  
David G. CARMICHAEL
Keyword(s):  
Risk Aversion ◽  
Risk Attitude ◽  
Risk Averse ◽  
Optimal Outcome ◽  
Original Solution ◽  
Project Outcome ◽  
Risk Neutral ◽  
Current Practices

Where a consortium of contractors is involved, there exist no guidelines in the literature on what the outcome sharing arrangement should be. The paper addresses this shortfall. It derives the optimal outcome sharing arrangement for risk-neutral and risk-averse contractors within the consortium, and between the consortium and a risk-neutral owner. Practitioners were engaged in a designed exercise in order to validate the paper’s propositions. The paper demonstrates that, at the optimum: the proportion of outcome sharing among contractors with the same risk-attitude should reflect the levels of their contributions; the proportion of outcome sharing among contractors with the same level of contribu­tion should be lower for contractors with higher levels of risk aversion; a consortium of risk-neutral contractors should receive or bear any favourable or adverse project outcome respectively; and the proportion of outcome sharing to a con­sortium of risk-averse contractors should reduce, and the fixed component of the consortium fee should increase, when the contractors become more risk-averse or the level of the project outcome uncertainty increases. The paper proposes an original solution to the optimal sharing problem in contracts with a consortium of contractors, thereby contributing to current practices in contracts management.

Do Migrants Think Differently? Evidence from Eastern European and Post-Soviet States

2018 ◽  
Vol 53 (3) ◽  
pp. 831-868 ◽  
Author(s):  
Ruxanda Berlinschi ◽  
Ani Harutyunyan
Keyword(s):  
Risk Aversion ◽  
International Migration ◽  
The Other ◽  
Eastern European ◽  
Risk Averse ◽  
Economic Liberalism ◽  
Self Selection ◽  
Using Data ◽  
Politically Active ◽  
Beliefs And Attitudes

This research investigates migrant self-selection on values, beliefs, and attitudes using data from Eastern European and former Soviet countries. We find that individuals who intend to emigrate are more politically active, more critical of governance and institutions, more tolerant toward other cultures, less tolerant of cheating, more optimistic, and less risk averse. With the exception of risk aversion, all selection patterns are heterogeneous across regions of origin. On the other hand, no self-selection pattern is detected on education, willingness to pay for public goods, and economic liberalism. These findings provide new insights into the determinants of international migration and reveal some of its less known consequences, such as a possible reduction of domestic pressure for political improvements in post-Soviet states due to politically active citizens’ higher propensity to emigrate.

Cutoff Threshold Decisions for Classification Algorithms with Risk Aversion

2021 ◽  
Author(s):  
Andrea C. Hupman
Keyword(s):  
Risk Aversion ◽  
Risk Attitude ◽  
Classification Algorithm ◽  
Classification Algorithms ◽  
Risk Averse ◽  
Optimal Cutoff ◽  
Data Set ◽  
Risk Neutral ◽  
Bayes Algorithm ◽  
Cutoff Threshold

Classification algorithms predict the class membership of an unknown record. Methods such as logistic regression or the naïve Bayes algorithm produce a score related to the likelihood that a record belongs to a particular class. A cutoff threshold is then defined to delineate the prediction of one class over another. This paper derives analytic results for the selection of an optimal cutoff threshold for a classification algorithm that is used to inform a two-action decision in the cases of risk aversion and risk neutrality. The results provide insight to how the optimal cutoff thresholds relate to the associated costs and the sensitivity and specificity of the algorithm for both the risk neutral and risk averse decision makers. The optimal risk averse threshold is not reliably above or below the optimal risk neutral threshold, but the relation depends on the parameters of a particular application. The results further show the risk averse optimal threshold is insensitive to the size of the data set or the magnitude of the costs, but instead is sensitive to the proportion of positive records in the data and the ratio of costs. Numeric examples and sensitivity analysis derive further insight. Results show the percent value gap from a misspecified risk attitude increases as the specificity of the classification algorithm decreases.

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