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Unser Alltag wird immer mehr von Technologien durchdrungen, welche uns bei der Ausführung von Tätigkeiten unterstützen oder gleich die gesamte Aufgabe eigenständig übernehmen. Smartphones erkennen Termine aus eingehenden E-Mails und tragen diese automatisch in einen Kalender ein, Autos halten automatisch ihre Fahrspuren oder das Navigationsgerät schlägt je nach Verkehrssituation eine alternative Route vor. Bei allen diesen Beispielen handelt es sich um smarte Systeme. Die Liste der verfügbaren smarten Systeme ist lang und der Marktanteil smarter Produkte wächst stetig. Die Nutzung von smarten Systemen kann Komfortgewinn und eine gesteigerte Sicherheit bringen. Der Preis für Komfort und Sicherheit ist aber die Weitergabe von Informationen und die Kontrollabgabe. Somit ist nicht eindeutig, ob Anwender ein smartes System nutzen würden. Von besonderem Interesse in dieser Arbeit ist, in wie weit der Automationsgrad, das wirkungsbezogene Risiko und das ursachenbezogene Risiko die Intention zur Nutzung und die tatsächliche Nutzung von smarten Systemen beeinflusst. In der Arbeit zeigte sich unter anderem, dass die wahrgenommenen Nachteile eines smarten Systems mit zunehmendem Automatisierungsgrad immer größere negative Auswirkungen auf die Intention haben dieses smarte System zu nutzen. Grund dafür ist die Angst vor einem Kontrollverlust, welcher mit dem zunehmenden Automatisierungsgrad einhergeht. Die Automatisierung führt auch dazu, dass sich die Befragten teilweise dem smarten System ausgeliefert fühlen. Ein weiterer Effekt ist, dass mit zunehmender Automatisierung das Vertrauen in das smarte System immer wichtiger wird. Während bei Systemen mit geringem wirkungsbezogenem Risiko die Vorteile noch eine entscheidende Rolle bei der Bildung der Intention spielen, treten bei smarten Systemen mit hohem wirkungsbezogenem Risiko stattdessen die Nachteile in den Vordergrund. Außerdem verlangt ein zunehmendes wirkungsbezogenes Risiko ein gesteigertes Vertrauen in das smarte System ab. In Situationen mit hohem ursachenbezogenen Risiko stieg die Wahrscheinlichkeit, dass die Nutzer das smarte System nutzen, wenn das Ergebnis des smarten Systems von dem zu erwartenden Ergebnis abweicht. Nutzer hinterfragen ihre eigenen Fähigkeiten in unsicheren Situationen und nutzen gerne die vermeintliche Kompetenz des smarten Systems.

Menschliches Verhalten auf Märkten wurde in den Wirtschaftswissenschaften lange Zeit durch die Schablone der Theorie der Effizienten Märkte betrachtet. Folgt man dieser Theorie, kalkulieren rationale Anleger ein, dass alle relevanten Informationen im Marktpreis eines Vermögensgegenstandes bereits enthalten sind und damit keinen Einfluss auf Entscheidungen von Anlegern haben. Die empirischen Ergebnisse der vorliegenden Arbeit weisen allerdings darauf hin, dass die vorhandenen Marktbedingungen sehr wohl Einfluss auf das Verhalten von Aktienmarkt-Investoren haben. Im einleitenden Teil der Arbeit beschreiben wir die Schwierigkeiten der Theorie der Effizienten Märkte, scheinbar irrationales Verhalten von Anlegern vor dem Hintergrund eines sich wandelnden Marktumfeldes zu erklären. Im zweiten Kapitel zeigen wir, dass die Gewinn- und Verlustmuster der vergangenen Tage die Investitionsentscheidungen privater Aktienmarktanleger beeinflussen. Zum einen lösen Aktienmarktmuster, die sich aus mehrheitlich positiven Tagen zusammensetzen, signifikant mehr Käufe und Verkäufe aus als Aktienmarktmuster mit mehrheitlich negativen Tagen. Zum anderen verkaufen Anleger nach mehrtägigen Aufwärtsbewegungen anteilig mehr Aktien als sie kaufen. Im 3. Teil der Arbeit entwickeln wir einen theoretischen Rahmen, der die im Investmentprozess vorhandenen Auslöser von Emotionen, wie die Entwicklung eigener Aktien und die allgemeine Aktienmarktumgebung, mit dem Risikoappetit von Anlegern verbindet. Unser Modell prognostiziert, dass Anleger mit einem hohen emotionalen Erregungslevel Aktien länger halten und damit höhere Risiken akzeptieren als weniger erregte Anleger. Der 4. Teil der Arbeit zeigt, wie das Marktumfeld zwar das Investitionsverhalten beeinflusst, wie es Anlegern aber auch gelingt, durch Lernprozesse nachteilige Verhaltensweisen wie den Dispositionseffekt zu vermeiden − und zwar ebenfalls in Abhängigkeit vom Marktumfeld. So weisen wir nach, dass Investoren sowohl in Bullen- als auch in Bärenmärkten dem Dispositionseffekt unterliegen, dass dieses Verhalten aber während der Bärenmärkte wesentlich stärker ausgeprägt ist. Allerdings können wir während des Bärenmarktes auch die größten Lernerfolge bei Anlegern beobachten. Damit zeigen unsere Ergebnisse, dass die Marktentwicklung bei zukünftigen Untersuchungen des Anlegerverhaltens berücksichtigt werden sollte., Human behavior in regard to financial issues has long been explained in the light of the efficient market hypothesis. Following the strict interpretation of this theory, investors in the financial markets take into account that all relevant information is already included in the market price of an asset. Accordingly, information from the past does not affect future prices as all information is instantly incorporated. However, focussing on the actual behavior of humans, our empirical results indicate that the existing market conditions influence the behavior of stock market investors. In the introductory chapter, we describe the difficulties of the efficient markets hypothesis in explaining the behavior of investors within a strictly rational frame. In the second chapter, we show that investors do consider the previous market development for their upcoming investment decisions. First, stock market patterns with predominantly positive days trigger significantly more trades than patterns with negative days. And second, after recent upward movements, investors sell proportionally more stocks than they buy. In the third chapter, we expound a theoretical framework that connects investment-related triggers of arousal, such as the performance of own stocks and the general market environment, with investors’ risk appetite in the decision-making processes. Our model predicts that aroused investors accept higher risks by holding stocks longer in comparison to their less aroused peers. In the fourth chapter, we show how two extreme market environments, the bull and the bear market, affect the disposition effect and especially learning to avoid this behavioral bias. Investors are subject to the bias in each market phase but with a far stronger propensity during the bear market. However, we show that investors also make the greatest progress in avoiding the disposition effect during this period. These results suggest that future studies about investors’ behavior in the financial markets should consider the market environment as an important determinant.

We develop the idea of using mean-variance preferences for the analysis of the first-price, all-pay auction. On the bidding side, we characterise the optimal strategy in symmetric all-pay auctions under mean-variance preferences for general distributions of valuations and any number of bidders. We find that, in contrast to winner-pay auction formats, only hightype bidders increase their bids relative to the risk-neutral case while low types minimise variance exposure by bidding low. Introducing asymmetric variance aversions across bidders into a Uniform valuations, two-player framework, we show that a more variance-averse type bids always higher than her less variance-averse counterpart. Taking mean-variance bidding behaviour as given, we show that an expected revenue maximising seller may want to optimally limit the number of participants. Although expected revenue for risk-neutral bidders typically dominates revenue under mean-variance bidding, if the seller himself takes account of the variance of revenue, he may find it preferable to attract bidders endowed with mean-variance preferences.

Reservoirs serve to compensate naturally fluctuating water availability and socio-economically driven water demand. To achieve this, flood water is retained and stored water is released to bridge periods of low flow. The required storage capacity when planning new dams and the operating rules of existing dams are determined on the basis of the observed flows at the site of the reservoir. The flow properties depend on the hydrology of the catchment area, which in turn is influenced by the climatic boundary conditions. Changes in climate therefore directly influence the input data used in reservoir design and the subsequent reservoir performance. A significant change in climate conditions is expected in the future due to the increasing concentration of greenhouse gases in the atmosphere. This raises the question of the impact of climate change on the performance of reservoirs and how adaption measures can be planed and chosen. The performance of reservoirs is evaluated probabilistically by considering the consequences and the probability of failure events. A distinction is made between failures due to floods and failures due to low flows. Probabilistic methods for evaluating the performance of flood protection provided by dams are well-established, whilst the corresponding method to evaluate the performance of dams that protectagainst low flows is newly developed. Combining these two methods makes it possible to determine the overall performance of a dam by means of the integrated water management risk for floods and low flows. The applied methods of stochastic generation of inflow boundary conditions allow us to quasi-continuously capture the potential impact of projected climate change and to map it using the climate impact function, which represents the relationship between climate-induced change of statistical properties of the inflow and the change in the performance of the studied reservoirs. The climate impact function assesses of the robustness of the reservoir. Robustness describes how sensitively the performance of the reservoir responds to changes in the inflow. Comparing the climate impact functions derived for different operation rules enables us to find adaption measures which preserve the performance of the reservoir for a climate-induced change in the inflow boundary conditions.

We define a class of risk-taking-neutral (RTN) background risks. These background risks have the property that they will not alter decisions made with respect to another risk, for individuals with HARA utility. If we wish to compare a decision made with and without some exogenous background risk, it is often easier to compare the decision made to one made with a RTN background risk. We use this methodology to prove and extend a well-known theorem about dynamic investment strategy, due to Mossin (1968a). We also use this methodology to analyze investment behavior in the presence of an income tax as well as to analyze investment behavior in the presence of particular types of background risks.

In this paper we propose the use of preferred outcome distributions as a new method to elicit individuals' value and probability weighting functions in decisions under risk. Extant approaches for the elicitation of these two key ingredients of individuals' risk attitude typically rely on a long, chained sequence of lottery choices. In contrast, preferred outcome distributions can be elicited through an intuitive graphical interface, and, as we show, the information contained in two preferred outcome distributions is sufficient to identify non-parametrically both the value function and the probability weighting function in rank-dependent utility models. To illustrate our method and its advantages, we run an incentive-compatible lab study in which participants use a simple graphical interface - the Distribution Builder (Goldstein et al. 2008) - to construct their preferred outcome distributions, subject to a budget constraint. Results show that estimates of the value function are in line with previous research but that probability weighting biases are diminished, thus favoring our proposed approach based on preferred outcome distributions.

Almost all important decisions in people's lives entail risky and delayed consequences. Regardless of whether we make choices involving health, wealth, love or education, almost every choice involves costs and benefits that are uncertain and materialize over time. Because risk and delay often arise simultaneously, theories of decision making should be capable of explaining how behavior under risk and over time interacts. There is, in fact, a growing body of evidence indicating important interactions between behaviorally revealed risk tolerance and patience. Risk taking behavior is delay dependent, and time discounting is risk dependent. Here we show that the inherent uncertainty of future events conjointly with people's proneness to weight probabilities nonlinearly generates a unifying framework for explaining time-dependent risk taking, risk-dependent time discounting, preferences for late resolution of uncertainty, and several other puzzling interaction effects between risk and time.

We systematically explore decision situations in which a decision maker bears responsibility for somebody else's outcomes as well as for her own in situations of payoff equality. In the gain domain we confirm the intuition that being responsible for somebody else's payoffs increases risk aversion. This is however not attributable to a 'cautious shift' as often thought. Indeed, looking at risk attitudes in the loss domain, we find an increase in risk seeking under responsibility. This raises issues about the nature of various decision biases under risk, and to what extent changed behavior under responsibility may depend on a social norm of caution in situations of responsibility versus naive corrections from perceived biases. To further explore this issue, we designed a second experiment to explore risk-taking behavior for gain prospects offering very small or very large probabilities of winning. For large probabilities, we find increased risk aversion, thus confirming our earlier finding. For small probabilities however, we find an increase of risk seeking under conditions of responsibility. The latter finding thus discredits hypotheses of a social rule dictating caution under responsibility, and can be explained through flexible self-correction models predicting an accentuation of the fourfold pattern of risk attitudes predicted by prospect theory. An additional accountability mechanism does not change risk behavior, except for mixed prospects, in which it reduces loss aversion. This indicates that loss aversion is of a fundamentally different nature than probability weighting or utility curvature. Implications for debiasing are discussed.

We investigate one possible explanation for observed rates of corrupt behavior namely that individual decision makers who frequently engage in illegal actions may underestimate the overall probability of being caught. This might in particular be true for petty corruption where small amounts of bribes are involved and the detection rate is rather low. To abstract from confounding effects of reciprocal behavior, we design an experiment where a public official decides upon accepting a bribe that leads to a higher present period income while facing the risk of being audited and being left with a considerable lower income in all subsequent periods. Because risk attitudes might differ when putting earned versus endowed income at risk, we compare treatments where participants either receive an endowment beforehand, or earn their income by conducting a real effort task in every period. Independent of the treatments we already find high rates of corruption in very early periods. Risk attitudes measured with a subsequent lottery-choice experiment do not correlate with the behavior observed in the corruption experiment. We explain our findings by a systematic underestimation of the overall probability of being audited. Although detection probability is small in each period, the probability of being caught only once is substantially high when engaging in corrupt behavior on a regular basis. Our findings have important political implications because the underestimation of the total risk involved in engaging in corrupt behavior might nullify measures to fight petty corruption by increased governmental auditing.

Often in cooperative situations, many aspects of the decision-making environment are uncertain. We investigate how cooperation is shaped by the way information about risk is presented (from description or from experience) and by differences in risky environments. Drawing on research from risky choice, we compare choices in stochastic social dilemmas to those in lotteries with equivalent levels of risk. Cooperation rates in games vary with different levels of risk across decision situations with the same expected outcomes, thereby mimicking behavior in lotteries. Risk presentation, however, only affected choices in lotteries, not in stochastic games. Process data suggests that people respond less to probabilities in the stochastic social dilemmas than in the lotteries. The findings highlight how an uncertain environment shapes cooperation and call for models of the underlying decision processes.

As societies are increasingly concerned with social risks, it is important to evaluate risks not only from an individual perspective, but also from a societal one. Many increases in social risk involve a simultaneous increase in risk and inequality. This paper presents an experiment which disentangles concerns for risk and inequality in a social risk context. Subjects choose between different types of allocations of risks over 10 other participants. The allocations differ only in terms of dispersion. We disentangle four types of dispersion: ex ante inequality, ex post inequality, individual risk, and collective risk. The results show that people are averse towards ex ante inequality and individual risk, whereas they are ex post inequality and collective risk seeking.

Social preference models were originally constructed to explain two things: why people spend money to affect the earnings of others and why the income of others influences reported happiness. We test these models in a novel experimental situation where participants face a risky decision that affects only their own earnings. In the social (individual) treatment participants do (not) observe the earnings of others. In the social treatment gambles therefore not only affect absolute but also relative earnings. Outcome-based social preference models therefore predict a treatment difference. We find that decisions are generally the same in both treatments, in line with rule-based social preference models, like procedural fairness.

The supposed irrelevance of historical costs for rational decision making has been the subject of much interest in the economic literature. In this paper we explore whether individual decision making under risk is affected by the cost of the supplied information. Outside of the lab, it is difficult to disentangle the effect of the cost of information itself from the effect of self-selection by individuals who tend to gain the most from this information. We thus create an environment in the lab where subjects are offered additional, useful and identical information on the state of the world across treatments. By varying the cost of information we can distinguish between selection and sunk cost effects. We find a systematic effect of sunk costs on the manner in which subjects update their beliefs on the state of the world. Subjects over-weigh costly information relatively to free information, which results in a 'push' of beliefs towards the extremes. This shift does not necessarily lead to behavior more attuned with Bayesian updating.

The Petersburg Paradox and its solutions are formulated in a uniform arrangement centered around d'Alembert's ratio test. All its aspects are captured using three mappings, a mapping from the natural numbers to the space of the winnings, a utility function defined on the space of the winnings, and a transformation of the utilities of the winnings. The main attempts at a solution of the Petersburg Paradox are labeled according to their most fervent proponents, viz. Bernoulli and Cramer, Buffon, and Menger. This paper also investigates the role of the probabilities for the Petersburg Paradox: they may well be used to solve a Petersburg Paradox, or to re-gain it by means of appropriate transformations. Thus, the probabilities are also instrumental for the Petersburg Paradox. The Petersburg Paradox can only be avoided for bounded utility functions. Its various solution proposals are but disguised attempts of filling in the missing behavioral justification for the boundedness of utility functions. This paper also corrects several misconceptions which have crept in the respective literature.

This paper presents a strategic model of risk-taking behavior in contests. Formally, we analyze an n-player winner-take-all contest in which each player decides when to stop a privately observed Brownian Motion with drift. A player whose process reaches zero has to stop. The player with the highest stopping point wins. Contrary to the explicit cost for a higher stopping time in a war of attrition, here, higher stopping times are riskier, because players can go bankrupt. We derive a closed-form solution of the unique Nash equilibrium outcome of the game. In equilibrium, the trade-off between risk and reward causes a non-monotonicity: highest expected losses occur if the process decreases only slightly in expectation.

We confront a representative sample of one 1,102 Dutch individuals with a series of incentivized investment decisions and also elicit their time preferences. There are two treatments that differ in the frequency at which individuals decide about the invested amount. The low frequency treatment stimulates decision makers to frame a sequence of risky decisions broadly rather than narrowly. We find that the framing effect is significantly larger for impatient than for patient individuals. This result is robust to controlling for various economic and demographic variables and for cognitive ability.

We consider two players facing identical discrete-time bandit problems with a safe and a risky arm. In any period, the risky arm yields either a success or a failure, and the first success reveals the risky arm to dominate the safe one. When payoffs are public information, the ensuing free-rider problem is so severe that the equilibrium number of experiments is at most one plus the number of experiments that a single agent would perform. When payoffs are private information and players can communicate via cheap talk, the socially optimal symmetric experimentation profile can be supported as a perfect Bayesian equilibrium for sufficiently optimistic prior beliefs. These results generalize to more than two players whenever the success probability per period is not too high. In particular, this is the case when successes occur at the jump times of a Poisson process and the period length is sufficiently small.

This study explores people's risk attitudes after having suffered large real-world losses following a natural disaster. Using the margins of the 2011 Australian floods (Brisbane) as a natural experimental setting, we find that homeowners who were victims of the floods and face large losses in property values are 50% more likely to opt for a risky gamble - a scratch card giving a small chance of a large gain ($ 500,000) - than for a sure amount of comparable value ($ 10). This finding is consistent with prospect theory predictions of the adoption of a risk-seeking attitude after a loss.

This paper introduces a contest model in which each player decides when to stop a privately observed Brownian motion with drift and incurs costs depending on his stopping time. The player who stops his process at the highest value wins a prize. Applications of the model include procurement contests and competitions for grants. We prove existence and uniqueness of the Nash equilibrium outcome, even if players have to choose bounded stopping times. We derive the equilibrium distribution in closed form. If the noise vanishes, the equilibrium outcome converges to - and thus selects - the symmetric equilibrium outcome of an all-pay auction. For two players and constant costs, each player’s profits increase if costs for both players increase, variance increases, or drift decreases. Intuitively, patience becomes a more important factor for contest success, which reduces informational rents.

This paper examines the effect of peers on individual risk taking. In the absence of informational motives, we investigate why social utility concerns may drive peer effects. We test for two main channels: utility from payoff differences and from conforming to the peer. We show experimentally that social utility generates substantial peer effects in risk taking. These are mainly explained by utility from payoff differences, in line with outcome-based social preferences. Contrary to standard assumptions, we show that estimated social preference parameters change significantly when peers make active choices, compared to when lotteries are randomly assigned to them.

We specify a stochastic economy-climate model, adapting Nordhaus' deterministic economy-climate model by allowing for Weitzman-type stochasticity. We show that, under expected power utility, the model is fragile to heavy-tailed distributional assumptions and we derive necessary and sufficient conditions on the utility function to avoid fragility. We solve our stochastic economy-climate model for two cases with compatible pairs of utility functions and heavy-tailed distributional assumptions. We further develop and implement a procedure to learn the input parameters of our model and show that the model thus specified produces robust optimal policies. The numerical results indicate that higher levels of uncertainty lead to less abatement and consumption, and to more investment.

Purpose/topicality: Demand and lead time uncertainty in business logistics increase, but can be mitigated by risk pooling. Risk pooling can reduce costs for a given service level, which is especially valuable in the current economic downturn. The extensive, but fragmented and inconsistent risk pooling literature has grown particularly in the last years. It mostly deals with specific mathematical models and does not compare the various risk pooling methods in terms of their suitability for specific conditions. Approach: Therefore this treatise provides an integrated review of research on risk pooling, notably on inventory pooling and the square root law, according to a value-chain structure. It identifies ten major risk pooling methods and develops tools to compare and choose between them for different economic conditions following a contingency approach. These tools are applied to a German paper merchant wholesaler, which suffers from customer demand and supplier lead time uncertainty. Finally, a survey explores the knowledge and usage of the various risk pooling concepts and their associations in 102 German manufacturing and trading companies. Triangulation (combining literature, example, modeling, and survey research) enhances our investigation. Originality/value: For the first time this research presents (1) a comprehensive and concise definition of risk pooling distinguishing between variability, uncertainty, and risk, (2) a classification, characterization, and juxtaposition of risk pooling methods in business logistics on the basis of value activities and their uncertainty reduction abilities, (3) a decision support tool to choose between risk pooling methods based on a contingency approach, (4) an application of risk pooling methods at a German paper wholesaler, and (5) a survey on the knowledge and utilization of risk pooling concepts and their associations in 102 German manufacturing and trading companies., Ziel/Aktualität: Nachfrage- und Lieferzeitunsicherheit in der Logistik nimmt zu, kann aber durch Risk-Pooling gesenkt werden. Risk-Pooling kann Kosten für einen gegebenen Servicegrad senken, was besonders in der gegenwärtigen Wirtschaftskrise nützlich ist. Die umfangreiche, aber zersplitterte und uneinheitliche Literatur zu Risk-Pooling ist vor allem in den letzten Jahren angewachsen. Sie beschäftigt sich überwiegend mit bestimmten mathematischen Modellen und vergleicht nicht die verschiedenen Risk-Pooling-Methoden hinsichtlich ihrer Eignung für bestimmte Bedingungen. Vorgehensweise: Deshalb liefert diese Dissertation eine ganzheitliche Besprechung der Forschung zu Risk-Pooling, besonders zu Inventory-Pooling und der Square-Root-Law, anhand einer Wertschöpfungskettenstruktur. Die Arbeit identifiziert zehn Risk-Pooling-Methoden und entwickelt auf Grundlage der Kontingenztheorie Werkzeuge, um diese Methoden für verschiedene wirtschaftliche Bedingungen zu vergleichen und geeignete auszuwählen. Diese Werkzeuge werden auf ein deutsches Papiergroßhandelsunternehmen angewendet, das unter Kundennachfrage- und Wiederbeschaffungszeitunsicherheit leidet. Schließlich untersucht eine Umfrage die Bekanntheit und Anwendung der verschiedenen Risk-Pooling-Konzepte in 102 deutschen Handels- und Produktionsunternehmen. Die Verbindung von Literatur-, Fallbeispiel-, Modellierungs- und Umfrageforschung (Triangulation) verbessert die Untersuchung. Neuigkeitswert: Diese Dissertation bietet erstmals (1) eine umfassende und genaue Definition von Risk-Pooling, die zwischen Variabilität, Unsicherheit und Risiko unterscheidet, (2) eine Klassifikation, eine Charakterisierung und einen Vergleich von Risk-Pooling-Methoden in der Logistik anhand von Wertschöpfungsaktivitäten und ihrer Fähigkeiten zur Unsicherheitsreduzierung, (3) ein Entscheidungsunterstützungswerkzeug beruhend auf der Kontingenztheorie, um Risk-Pooling-Methoden auszuwählen, (4) eine Anwendung von Risk-Pooling-Methoden bei einem deutschen Papiergroßhändler und (5) eine Umfrage zur Bekanntheit und Anwendung von Risk-Pooling-Konzepten in 102 deutschen Handels- und Produktionsunternehmen.

Decision making usually involves uncertainty and risk. Understanding which parts of the human brain are activated during decisions under risk and which neural processes underly (risky) investment decisions are important goals in neuroeconomics. Here, we reanalyze functional magnetic resonance imaging (fMRI) data on 17 subjects which were exposed to an investment decision task from Mohr et al. (2010b). We obtain a time series of three-dimensional images of the blood-oxygen-level dependent (BOLD) fMRI signals. Our goal is to capture the dynamic behavior of specific brain regions of all subjects in this high-dimensional time series data, by a flexible factor approach resulting in a low dimensional representation. We apply a panel version of the dynamic semiparametric factor model (DSFM) presented in Park et al. (2009) and identify task-related activations in space and dynamics in time. Further, we classify the risk attitudes of all subjects based on the estimated lowdimensional time series. Our classification analysis successfully confirms the estimated risk attitudes derived directly from subjects' decision behavior. Keywords: risk, risk attitude, fMRI, decision making, medial orbifrontal cortex, semiparametric model, factor structure, SVMDecision making usually involves uncertainty and risk. Understanding which parts of the human brain are activated during decisions under risk and which neural processes underly (risky) investment decisions are important goals in neuroeconomics. Here, we reanalyze functional magnetic resonance imaging (fMRI) data on 17 subjects which were exposed to an investment decision task from Mohr et al. (2010b). We obtain a time series of three-dimensional images of the blood-oxygen-level dependent (BOLD) fMRI signals. Our goal is to capture the dynamic behavior of specific brain regions of all subjects in this high-dimensional time series data, by a exible factor approach resulting in a low dimensional representation. We apply a panel version of the dynamic semiparametric factor model (DSFM) presented in Park et al. (2009) and identify task-related activations in space and dynamics in time. Further, we classify the risk attitudes of all subjects based on the estimated lowdimensional time series. Our classification analysis successfully confirms the estimated risk attitudes derived directly from subjects' decision behavior.

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 an experiment we find that risk aversion for gains is robust under time pressure whereas risk seeking for losses turns into risk aversion under time pressure. For mixed prospects, subjects become 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 under time pressure. We discuss the implications of our findings for decision making situations that involve time pressure.

This paper studies the problem of optimal investment with CRRA (constant, relative risk aversion) preferences, subject to dynamic risk constraints on trading strategies. The market model considered is continuous in time and incomplete; furthermore, financial assets are modeled by Itô processes. The dynamic risk constraints (time, state dependent) are generated by risk measures. The optimal trading strategy is characterized by a quadratic BSDE. Special risk measures (Value-at-Risk, Tail Value-at-Risk and Limited Expected Loss ) are considered and a three-fund separation result is established in these cases. Numerical results emphasize the effect of imposing risk constraints on trading.

Agents involved in the formation of a social or economic network typically face uncertainty about the benefits of creating a link. However, the interplay of such uncertainty and risk attitudes has been neglected in the network formation literature. We propose a dynamic network formation model that builds on standard microeconomic concepts of utility maximization, incomplete information, and risk aversion. The model predicts that an agent's risk aversion is correlated with her network clustering coefficients, but not with her degree. We discover a mechanism that generates a correlation between network position and payoffs of individuals. Moreover, we show how the generated network architecture depends on the uncertainty in the environment it is embedded in.

The quintessence of recent natural science studies is that the 2°C target can only be achieved with massive emission reductions in the next few years. The central twist of this paper is the addition of this limited time to act into a non-perpetual real options framework analysing optimal climate policy under uncertainty. The window-of-opportunity modelling setup shows that the limited time to act may spark a trend reversal in the direction of low-carbon alternatives. However, the implementation of a climate policy is evaded by high uncertainty about possible climate pathways.

In this paper is carry out an analysis of affinities in the perception on how to leave the crisis behind. For that we have considered the opinion of experts belonging to the politics, the economy, the company and the banking in order to gather those opinions and to look for likeness and differences in their answers. The applied methodology might be useful in searching solutions according to the maximum consensus among experts and therefore being of some help for taking any decision.

Die Einführung leistungsorientierter Entgeltsysteme stellt Mitarbeiter und Unternehmen vor besondere Herausforderungen. Dabei verändert sich vor allem die Rolle des Mitarbeiters. War er vormals Ausführender der ihm übertragenen Arbeitsaufgaben, wird er zunehmend zum eigenverantwortlichen Gestalter und Mitunternehmer. Im Rahmen einer multiplen Fallstudie wird zunächst der Frage nachgegangen, wie die Mitarbeiter in drei karitativen Einrichtungen die Einführung einer leistungsorientierten Vergütungskomponente erleben. Dazu werden inhaltliche Gestaltungsmerkmale der Entgeltsysteme, Merkmale des Einführungsprozesses und ihre Auswirkungen untersucht. Die Ergebnisse zeigen, dass die Mitarbeiter in allen Einrichtungen dem Aspekt der Finanzierung des variablen Vergütungsanteils eine wesentliche Bedeutung beimessen. Wird dieser Anteil durch die Variabilisierung bisher garantierter, fixer Vergütungsanteile finanziert, entstehen unsichere Gehalts-anteile und es erhöht sich das Risiko von möglichen Gehaltsverlusten. In der Einrichtung mit dem höchsten Entgeltrisiko führte dieser Umstand dazu, dass Mitarbeiter und Vorgesetzte durch informelle Absprachen versucht haben, mögliche Verluste zu vermeiden. Wird der variable Entgeltanteil durch die Einrichtungen mitfinanziert, erhöhen sich hingegen die Chancen auf Einkommensgewinne, was auch zu einer höheren Akzeptanz der neuen Entgeltsysteme beiträgt. Aufbauend auf den Ergebnissen der Fallstudie werden in einer quantitativen Analyse die Auswirkungen eines erhöhten Entgeltrisikos auf die Zufriedenheit der Mitarbeiter mit ihrem variablen Vergütungsanteil (Bonuszufriedenheit) untersucht. Dabei wird das Entgeltrisiko durch drei konzeptuelle Facetten operationalisiert: die Variabilität der Entlohnung, das Ausmaß möglicher Verluste und das Verhältnis von Risiko und Chance (RCV). Entgegen der bisherigen Annahme in der Forschungsliteratur, dass vor allem die Variabilität der Entlohnung ausschlaggebend für die Auswirkungen von Entgeltrisiko ist, zeigen regressionsanalytische Ergebnisse, dass in der Einführungsphase neuer Entgeltsysteme vor allem das RCV einen signifikanten Effekt auf die Bonuszufriedenheit der Mitarbeiter hat. Die Ergebnisse einer multiplen Mediationsanalyse legen nahe, dass der Effekt von RCV auf die Bonuszufriedenheit zum Teil von Einstellungen der distributiven und prozeduralen Gerechtigkeit vermittelt wird. Wei-terführende Analysen ergeben, dass der Zusammenhang zwischen dem RCV und der Bonuszufriedenheit durch zwei moderierende Variablen beeinflusst wird: zum einen durch die partizipative Beteiligung der Mitarbeiter am Einführungsprozess und zum anderen durch die individuelle Präferenz für leistungsorientierte Entlohnung. Vor allem bei hoher partizipativer Beteiligung wirkt sich ein günstiges RCV positiv auf die Bonuszufriedenheit der Mitarbeiter aus. Außerdem sind jene Mitarbeiter unzufriedener mit einem risiko-reichen Entgeltsystem, die eine stark ausgeprägte Präferenz für leistungsorientierte Entlohnung besitzen., The introduction of variable pay poses various challenges for organisations and their employees. Especially the role of the employee is changing when performance related pay is implemented. Along with a higher responsibility for business processes and outcomes employees also face higher risk for loosing variable parts of their compensation package. In this dissertation the effects of variable pay on employees" attitudes and organisational variables are analysed. As a first step a multiple case study with three organisations in the charitable sector is carried out to answer the question how employees are experiencing the introduction of performance related pay. Different sources of qualitative and quantitative data are used to contrast the three cases in terms of structural aspects of the pay system, features of the implementation process and organisational outcomes. Results show that the most influential success factor is how the variable pay component is financed. If a pay system is restructured and formerly fixed parts are becoming variable then more employees report higher compensation risk and lower pay satisfaction. If this is the case, counterproductive work behaviours and gaming, which means that employees and supervisors are joining forces to avoid loss of pay, is getting highly probable. If a variable component is added on top and the pay system obtains another layer, then chances are rising that some additional profit could be realised. Under this condition the general acceptance of a variable pay system is getting more likely. On the basis of these results a quantitative analysis of compensation risk and its impact on variable pay satisfaction (bonus satisfaction) is conducted. Contrary to the existing paradigm, compensation risk is not only operationalized as the overall variability of pay but additionally as the amount of possible losses and the ratio of possible losses and gains (risk-chance-ratio). Results of hierarchical regression analyses show that risk-chance-ratio is a significant negative predictor of bonus satisfaction. Further analyses indicate that employees" perceptions of distributive and procedural justice are mediating the relationship between risk-chance-ratio and bonus satisfaction. In addition, two moderating variables are identified: employee involvement during the implementation process and the preference for performance related pay. Especially when employees are highly involved the beneficial effect of a positive risk-chance-ratio on bonus satisfaction could be observed. Besides that, employees with a high preference for individual-oriented variable pay are very much dissatisfied with a pay-at-risk system where chances for additional profits are low.

Experiments on choice under risk typically involve multiple decisions by individual subjects. The choice of mechanism for selecting decision(s) for payoff is an essential design feature that is often driven by appeal to the isolation hypothesis or the independence axiom. We report two experiments with 710 subjects. Experiment 1 provides the first simple test of the isolation hypothesis. Experiment 2 is a crossed design with six payoff mechanisms and five lottery pairs that can elicit four paradoxes for the independence axiom and dual independence axiom. The crossed design discriminates between: (a) behavioral deviations from postulated properties of payoff mechanisms; and (b) behavioral deviations from theoretical implications of alternative decision theories. Experiment 2 provides tests of the isolation hypothesis and four paradoxes. It also provides data for tests for portfolio effect, wealth effect, reduction, adding up, and cross-task contamination. Data from Experiment 2 suggest that a new mechanism introduced herein may be less biased than random selection of one decision for payoff.

The present analysis sheds light on the setting up a regional rating agency in Asia in the wake of recent financial crisis. We investigate the policy facing a financial regulator while evaluating whether or not to admit new entrants into the credit rating market. In an incomplete contracting framework, we show that an impartial financial regulatory body (represented by a benevolent supranational organization) can facilitate credit ratings of high quality by allowing for the entry of new rating agencies on a non-single basis than it does for a mere single entry. This finding is caused by increased competition among the rating agencies, which induces higher quality of rating services even should rating agencies still exert below their maximum level of efforts.

We propose a method to measure the intensity of risk aversion, prudence (downside risk aversion) and temperance (outer risk aversion) in experiments. Higher-order risk compensations are defined within the proper risk apportionment model of Eeckhoudt and Schlesinger [American Economic Review, 96 (2006) 280] that are elicited using a multiple price list format. This approach is not based on expected utility theory. In our experiment we find evidence for risk aversion, prudence and temperance. Women demand higher risk compensations for all orders. The highest compensation is demanded for taking downside risk, not for being (second order) risk-loving. This highlights the importance of prudence when considering economic decisions under risk.

It is often said that prudence and temperance play key roles in aversion to negative skewness and kurtosis, respectively. This paper puts a new perspective on these relationships and presents a characterization of higher-order risk preferences in terms of statistical moments. An implication is, for example, that prudence implies preference for distributions with higher skewness as defined by all odd moments. Moreover, we show that this preference is robust towards variation in kurtosis as defined by all even moments. We thus speak of the kurtosis robustness feature of prudence. Further, we show that all higher-order risk preferences of odd order imply skewness preference, but for different distributions than prudence. Similar results are presented for temperance and higher-order risk preferences of even order that can be related to kurtosis aversion and have a skewness robustness feature.

This paper studies the effects of heterogeneity in planning propensity on wealth inequality and asset prices. I consider an economy populated by attentive and inattentive agents. Attentive agents plan their consumption period by period, while inattentive agents plan every other period. Infrequent planning increases uncertainty concerning future income or future asset returns. In general equilibrium, inattentive consumers trade at unfavorable prices. If the only source of uncertainty is future income, inattentive consumers will still accumulate more wealth. In contrast, in a version of the model driven by uncertain asset returns, infrequent planning produces the opposite result: inattentive investors accumulate less wealth, in line with empirical evidence. Moreover, asset prices are much more volatile than in a representative agent model with full attention, because changes in asset prices must induce attentive consumers to voluntarily bear the burden of adjusting to aggregate shocks.

Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education.

Optimism bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk, such as expected utility theory and prospect theory. Hence, to explain the evidence suggesting that agents are optimistically biased, we propose an alternative model of risky choice, affective decision making, where decision weights - which we label affective or perceived risk - are endogenized. Affective decision making (ADM) is a strategic model of choice under risk where we posit two cognitive processes - the rational and the emotional process. The two processes interact in a simultaneous-move intrapersonal potential game, and observed choice is the result of a pure Nash equilibrium strategy in this game. We show that regular ADM potential games have an odd number of locally unique pure strategy Nash equilibria, and demonstrate this finding for ADM in insurance markets. We prove that ADM potential games are refutable by axiomatizing the ADM potential maximizers.

Being the leader in a group often involves making risky decisions that affect the payoffs of all members, and the decision to take this responsibility in a group is endogenous in many contexts. In this paper, we experimentally study: (1) the willingness of men and women to make risky decisions on behalf of a group, (2) the amount of risk men and women take for the group, in comparison to their individual decisions. We observe a striking difference between males and females, with a much lower fraction of women being willing to make the group decision than men. The amount of risk taken for the group is generally lower than in the case where subjects decide for themselves only, indicating a cautious shift. The women that would like to make the group decision and the women that do not are no different in terms of how much risk they take for themselves, nor for their group. For men, on the other hand, we find that the ones who would like to lead tend to take more risk on behalf of the group. We also present several results on the relationship of risk-taking and leadership decisions with personality traits.

We explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A CCP can implement it by offering partial insurance for customized contracts.

This paper investigates a general relationship between risk and time preferences. I consider a decision maker who chooses between consumption of a particular prize in one period and a different prize in another period. The individual believes that today's good is certain, and that, as the promised date for a future good becomes increasingly distant, the probability of his consuming the good decreases. Under these assumptions, this paper shows that the individuals exhibits the common ratio effect, the certainty effect, and the expected utility if and only if he discounts hyperbolically, quasi-hyperbolically and exponentially, respectively.

This paper examines a continuous-time intertemporal consumption and portfolio choice problem for an ambiguity-averse investor with multiple priors when the expected return of a risky asset is unobservable and follows a hidden Markov chain. The investor's beliefs over investment opportunities are represented by a set of priors over the process governing the dynamics of the conditional estimates of the unobservable state. The investor is assumed to have Chen and Epstein's (2002) recursive multiple priors utility preferences. Using the Malliavin calculus technique, we characterize the optimal consumption and portfolio rules explicitly in terms of the Malliavin derivatives and stochastic integrals. We find that continuous Bayesian revisions under incomplete information can generate an ambiguity-driven hedging demand that mitigates the intertemporal hedging demand for the risky asset. In addition, ambiguity aversion magnifies the importance of the intertemporal hedging demand.

The prior paper in this sequel, Pope (2009) introduced the concept of a nominalist heuristic, defined as a focus on prominent numbers, indices or ratios. In this paper the concept is used to show three things in how scientists and practitioners analyse and evaluate to decide (conclude). First, in constructing theories such as purchasing power and interest parity to predict exchange rates and to advocate floating exchange rates, economists unwittingly employ nominalist heuristics. Second, nominalist heuristics have influenced actual exchange rates through the centuries, and this finding is replicated in the laboratory. Third, nominalist heuristics are incompatible with expected utility theory which excludes the evaluation stage, and are also incompatible with prospect theory which assumes that, while the evaluation stage can involve systematic mistakes, the overall decision situation is ultra simple. It is so simple that: a) economists and psychologists can mechanically model and identify what is a mistake, and b) decision makers can maximise. However, contrary to prospect theory, in the typical complex situation, neither a) nor b) holds. Assuming that a) and b) hold has resulted in the 1988 crisis from applying the Black Scholes formulae to forward exchange rates and contributed to sequel financial crises including that of 2007-2009. What is required is a fundamentally different class of models that allow for the progressive anticipated changes in knowledge ahead faced under risk and uncertainty, namely models under the umbrella of SKAT, the Stages of Knowledge Ahead Theory. The paper’s findings support a single world currency rather than variable unpredictable exchange rates subjected to the vagaries of how prominent numbers, ratios and indices influence events via the models of scientists and practitioners.

This study attempts to combine two traditional fields in microeconomics: individual decision making under risk and decision making in an interpersonal context. The influence of social comparison on risky choices is explored in an experiment in which participants make a series of choices between lotteries with only positive outcomes. Three kinds of choice situations are employed. In the loss and gain context the social referent receives a fixed payoff that is respectively higher and lower than all possible payoffs of the decision maker. In the neutral context social referent and decision maker will always earn the same amount. In the gain and loss contexts the decision maker has no influence on the earnings of the social referent so strategic behavior or social preferences can play no role. We find that decision makers are more risk-averse in the loss context than in the gain context, with the behavior in the neutral context in between. This result is in opposition to the predictions of prospect theory extrapolated to a social context.

International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the valuation channel of external adjustment, namely capital gains and losses on the country's external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. Firstorder excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods.

In general, models in finance assume that investors are risk averse. An example of such a recent model is the pioneering work of Aumann and Serrano, which presents an economic index of riskiness of gambles which is independent of wealth and holds (as might be understood from the adjective 'economic') for exclusively risk averse investors. In their paper, they discuss gambles with positive expected returns which will be accepted or rejected by agents which different levels of risk aversion. The question never asked by the authors (and in most of the finance literature) is: Who is offering these attractive gambles? To arrive at an answer, we extend the Aumann-Serrano risk index in such a way that it accommodates gambles with either positive or negative expectations and is thus suitable for both the risk averse and risk lovers. Once we allow for the existence of risk lovers, it may be shown that in financial markets, many gambles with negative expectations are taken either knowingly or unknowingly so that there are always people that act as if they are risk lovers. The paper concludes with a brief discussion of the implications of our result, in particular that gambling is by no means restricted to the casino or the track.

This paper investigates the optimal monetary policy response to a shock to collateral when policymakers act under discretion and face model uncertainty. The analysis is based on a New Keynesian model where banks supply loans to transaction constrained consumers. Our results confirm the literature on model uncertainty with respect to a cost-push shock. Insuring against model misspecification leads to a more aggressive policy response. The same is true for a shock to collateral. A preference for robustness leads to a more aggressive policy. Increasing the weight attached to interest rate smoothing raises the degree of aggressiveness. Our results indicate that a preference for robustness crucially depends on the way different types of disturbances affect the economy: in the case of a shock to collateral the policymaker does not need to be as much worried about model misspecification as in the case of a conventional cost-push shock.

Data on contestants' choices in Italian Game Show Affari Tuoi are analysed in a way that separates the effect of risk attitude (preferences) from that of beliefs concerning the amount of money that will be offered to contestants in future rounds. The most important issue addressed in the paper is what belief function is actually being used by contestants. The parameters of this function are estimated freely along with the parameters of a choice model. Separate identification of the belief function and preferences is possible by virtue of the fact that at a certain stage of the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rational expectations hypothesis is tested by comparing the estimated belief function with the true offer function which is estimated using data on offers actually made to contestants. We find that there is a significant difference between these two functions, and hence we reject the rational expectations hypothesis. However, when a simpler rule-of-thumb structure is as- sumed for the belief function, we find a correspondence to the function obtained from data on actual offers. Our overall conclusion is that contestants are rational to the extent that they make use of all available relevant information, but are not fully rational because they are not processing the information in an optimal way. The importance of belief-formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward-looking as opposed to myopic.