Risky choice and risk aversion

This work examines the validity of the two main assumptions of relative risk-aversion models of educational inequality. We compare the Breen-Goldthorpe (BG) and the Breen-Yaish (BY) models in terms of their assumptions about status maintenance motives and beliefs about the occupational risks associated with educational decisions. Concerning the first assumption, our contribution is threefold. First, we criticise the assumption of the BG model that families aim only at avoiding downward mobility and are insensitive to the prospects of upward mobility. We argue that the loss-aversion assumption proposed by BY is a more realistic formulation of status-maintenance motives. Second, we propose and implement a novel empirical approach to assess the validity of the loss-aversion assumption. Third, we present empirical results based on a sample of families of lower secondary school leavers indicating that families are sensitive to the prospects of both upward and downward mobility, and that the loss-aversion hypothesis of BY is empirically supported. As regards the risky choice assumption, we argue that families may not believe that more ambitious educational options entail occupational risks relative to less ambitious ones. We present empirical evidence indicating that, in France, the academic path is not perceived as a risky option. We conclude that, if the restrictive assumptions of the BG model are removed, relative-risk aversion needs not drive educational inequalities.

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Contrasting Rational and Psychological Analyses of Political Choice

American Political Science Review ◽

10.2307/1962487 ◽

1988 ◽

Vol 82 (3) ◽

pp. 719-736 ◽

Cited By ~ 376

Author(s):

George A. Quattrone ◽

Amos Tversky

Keyword(s):

Risk Aversion ◽

Prospect Theory ◽

Expected Utility ◽

Reference Point ◽

Utility Theory ◽

Expected Utility Theory ◽

Risky Choice ◽

Political Candidates ◽

Risk Seeking ◽

Psychological Analysis

We contrast the rational theory of choice in the form of expected utility theory with descriptive psychological analysis in the form of prospect theory, using problems involving the choice between political candidates and public referendum issues. The results showed that the assumptions underlying the classical theory of risky choice are systematically violated in the manner predicted by prospect theory. In particular, our respondents exhibited risk aversion in the domain of gains, risk seeking in the domain of losses, and a greater sensitivity to losses than to gains. This is consistent with the advantage of the incumbent under normal conditions and the potential advantage of the challenger in bad times. The results further show how a shift in the reference point could lead to reversals of preferences in the evaluation of political and economic options, contrary to the assumption of invariance. Finally, we contrast the normative and descriptive analyses of uncertainty in choice and address the rationality of voting.

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Are educational track decisions risky? Evidence from Sweden on the assumptions of risk-aversion models

10.31235/osf.io/t7g5z ◽

2021 ◽

Author(s):

Anton B Andersson ◽

Carlo Barone ◽

Martin Hällsten

Keyword(s):

Risk Aversion ◽

Vocational Education ◽

Tertiary Education ◽

Safety Net ◽

Risky Choice ◽

Academic Track ◽

Academic Tracks ◽

Secondary Track ◽

The Life Course ◽

The Cost

Relative risk aversion (RRA) models explain class inequalities in education with reference to risk avoidance, i.e., the risky choice assumption (RCA). Whether education entails any risks has been subject to minimal scrutiny. In this paper, we test whether or not vocational education is a safety net that protects from marginalization but at the cost of limited access to tertiary education and service class positions. We present an empirical assessment for upper-secondary track choices in Sweden, contrasting the vocational and the academic tracks for those that do not pursue higher educational degrees. The only evidence in favor of the RCA is that when taking selection into account, graduates of the academic track without a tertiary degree initially face higher risks of not being stably employed in their early 20s than their counterparts from vocational education. Differences between secondary tracks in registered unemployment risks are small throughout the life course and, if anything, they favor the academic track for both genders and cohorts. Moreover, the academic track significantly protects men of both cohorts from the risk of entering unskilled routine occupations. We conclude that the support for the RCA is scant at best.

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Flexible Utility Function Approximation via Cubic Bezier Splines

10.31234/osf.io/2ugwr ◽

2019 ◽

Author(s):

Sangil Lee ◽

Chris M. Glaze ◽

Eric T. Bradlow ◽

Joe Kable

Keyword(s):

Risk Aversion ◽

Function Approximation ◽

Functional Form ◽

Predictive Accuracy ◽

Parametric Model ◽

Risky Choice ◽

Parametric Models ◽

Utility Models ◽

Patterns Of Behavior ◽

Novel Method

In intertemporal and risky choice decisions, parametric utility models are widely used for predicting choice and measuring individuals’ impulsivity and risk aversion. However, parametric utility models cannot describe data deviating from their assumed functional form. We propose a novel method using Cubic Bezier Splines (CBS) to flexibly model smooth and monotonic utility functions that can be fit to any dataset. CBS shows higher descriptive and predictive accuracy over extant parametric models and can identify common yet novel patterns of behavior previously unaccounted for. Furthermore, CBS provides measures of impulsivity and risk aversion that do not depend on parametric model assumptions.

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Are public managers more risk averse? Framing effects and status quo bias across the sectors

Journal of Behavioral Public Administration ◽

10.30636/jbpa.21.35 ◽

2019 ◽

Vol 2 (1) ◽

Cited By ~ 2

Author(s):

Sean Nicholson-Crotty ◽

Jill Nicholson-Crotty ◽

Sean Webeck

Keyword(s):

Private Sector ◽

Risk Aversion ◽

Public Management ◽

Framing Effects ◽

Risky Choice ◽

Status Quo ◽

Status Quo Bias ◽

Risk Averse ◽

Public And Private ◽

Public Managers

Modern reforms meant to incentivize public managers to be more innovative and accepting of risk are often implicitly based in the longstanding assumption that public employees are more risk averse than their private sector counterparts. We argue, however, that there is more to learn about the degree to which public and private managers differ in terms of risk aversion. In order to address this gap, we field a series of previously validated experiments designed to assess framing effects and status quo bias in a sample of public and private sector managers. Our results indicate that public managers are not more risk averse or anchored to the status quo than their private sector counterparts; in fact, the findings suggest the opposite may be true under some conditions. In addition, our results fail to confirm previous findings in the literature suggesting that public service motivation is associated with risk aversion. We conclude with a discussion of the implications of these results for the study of risky choice in the public sector and for modern public management reforms.

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(Over)insuring Modest Risks

American Economic Journal Applied Economics ◽

10.1257/app.2.4.177 ◽

2010 ◽

Vol 2 (4) ◽

pp. 177-199 ◽

Cited By ~ 106

Author(s):

Justin Sydnor

Keyword(s):

Standard Model ◽

Risk Aversion ◽

Risky Choice ◽

Expected Value ◽

Insurance Markets ◽

Measures Of Risk ◽

Risk Parameters ◽

Level Of Risk

Despite the large literature on anomalies in risky choice, very little research has explored the relevance of these insights in real insurance markets. This paper uses new data on consumers' choices of deductibles for home insurance to provide evidence that a surprising level of risk aversion over modest stakes is a reality in the market. Most customers purchase low deductibles despite costs significantly above the expected value. Fitting these choices to a standard model of risk aversion yields implausibly large measures of risk parameters. Potential explanations and the implications of these results for understanding the market for insurance are discussed. (JEL D14, D81, G21, G22)

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Flexible Utility Function Approximation via Cubic Bezier Splines

Psychometrika ◽

10.1007/s11336-020-09723-4 ◽

2020 ◽

Vol 85 (3) ◽

pp. 716-737

Author(s):

Sangil Lee ◽

Chris M. Glaze ◽

Eric T. Bradlow ◽

Joseph W. Kable

Keyword(s):

Risk Aversion ◽

Function Approximation ◽

Functional Form ◽

Predictive Accuracy ◽

Parametric Model ◽

Risky Choice ◽

Parametric Models ◽

Utility Models ◽

Patterns Of Behavior ◽

Novel Method

Abstract In intertemporal and risky choice decisions, parametric utility models are widely used for predicting choice and measuring individuals’ impulsivity and risk aversion. However, parametric utility models cannot describe data deviating from their assumed functional form. We propose a novel method using cubic Bezier splines (CBS) to flexibly model smooth and monotonic utility functions that can be fit to any dataset. CBS shows higher descriptive and predictive accuracy over extant parametric models and can identify common yet novel patterns of behavior that are inconsistent with extant parametric models. Furthermore, CBS provides measures of impulsivity and risk aversion that do not depend on parametric model assumptions.

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Replicating the Disease framing problem during the 2020 COVID-19 pandemic: A study of stress, worry, trust, and choice under risk

PLoS ONE ◽

10.1371/journal.pone.0257151 ◽

2021 ◽

Vol 16 (9) ◽

pp. e0257151

Author(s):

Nikolay R. Rachev ◽

Hyemin Han ◽

David Lacko ◽

Rebekah Gelpí ◽

Yuki Yamada ◽

...

Keyword(s):

Risk Aversion ◽

Perceived Stress ◽

Large Scale ◽

Framing Effect ◽

Risky Choice ◽

Safety Measures ◽

Risky Choices ◽

Large Scale Survey ◽

Choice Framing ◽

Practical Implications

In the risky-choice framing effect, different wording of the same options leads to predictably different choices. In a large-scale survey conducted from March to May 2020 and including 88,181 participants from 47 countries, we investigated how stress, concerns, and trust moderated the effect in the Disease problem, a prominent framing problem highly evocative of the COVID-19 pandemic. As predicted by the appraisal-tendency framework, risk aversion and the framing effect in our study were larger than under typical circumstances. Furthermore, perceived stress and concerns over coronavirus were positively associated with the framing effect. Contrary to predictions, however, they were not related to risk aversion. Trust in the government’s efforts to handle the coronavirus was associated with neither risk aversion nor the framing effect. The proportion of risky choices and the framing effect varied substantially across nations. Additional exploratory analyses showed that the framing effect was unrelated to reported compliance with safety measures, suggesting, along with similar findings during the pandemic and beyond, that the effectiveness of framing manipulations in public messages might be limited. Theoretical and practical implications of these findings are discussed, along with directions for further investigations.

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