Study explores correlation between individual risk attitudes, determined through binary lottery choices, and market behavior in experimental asset markets.
Analysis involves 26 independent experimental markets with 280 participants, revealing that higher risk aversion correlates with lower market activity.
Notable gender differences found: women are generally more risk averse than men, leading to fewer offers and trades.
Understanding individual risk attitude is crucial in managerial and financial decision-making.
Risk attitudes influence predictions from standard finance theories, such as portfolio theory and the Capital Asset Pricing Model (CAPM).
Legal obligations for investment consultants to assess and communicate potential investment risks incorporate risk classifications stemming from individual attitudes.
Risk attitude can be gauged using:
Expected Utility Framework: Eliciting choices over lotteries with known probabilities reflecting curvature of utility functions.
Psychometric Approaches: Surveys and scales asking for agreement on statements regarding risk.
Existing literature indicates a lack of consensus on how risk attitude translates into behavioral choices, particularly in market settings.
Market Activity and Risk Aversion
Greater risk aversion leads to significantly lower market activity (number of bids/asks and trades).
Gender Differences
Women display less market activity compared to men; submit fewer bids and offers, concluding fewer contracts.
Risk Aversion Measurement
Women exhibit higher risk aversion as revealed by their lottery choices.
Initial Endowments
Higher initial cash holdings correlate with reduced market activity and fewer trades.
Initial asset holdings impact trade completion but do not influence total bids/asks submitted.
Participants: 280 undergraduate students; structured trading in computerized asset markets using z-Tree software.
Markets varied regarding trading periods (13 or 18), initial endowments (assets/cash), and participant configurations (8 or 12 subjects per market).
Structured opportunity for practice with trial markets before actual trading.
Aggregate Market Behavior: Overall findings indicate an inverse relationship between risk aversion and market engagement.
Lower individual risk aversion correlates with increased bids, asks, and overall trades.
Gender Findings: Results indicate that women submit significantly fewer bids/asks in comparison to men, validating previous research suggesting greater female risk aversion.
Gender differences were particularly pronounced for submitted offers but less evident in accepting standing offers.
Findings prompt consideration of how risk-averse individuals may shape market dynamics.
Call for more integrated research into the interactions between risk attitude, competition, and gender effects on market behavior.
Future studies should explore other characteristics influencing trading behavior, such as overconfidence and contextual risk perceptions.