Fellner_Maciejovsky_2007

Risk Attitude and Market Behavior

• 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.

Importance of Risk Attitude

• 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.

Measurement of Risk Attitude

• 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.

Key Observations from the Study

1. Market Activity and Risk Aversion

   • Greater risk aversion leads to significantly lower market activity (number of bids/asks and trades).

2. Gender Differences

   • Women display less market activity compared to men; submit fewer bids and offers, concluding fewer contracts.

3. Risk Aversion Measurement

   • Women exhibit higher risk aversion as revealed by their lottery choices.

4. 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.

Experimental Design and Procedure

• 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.

Results

• 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.

Implications and Future Research

• 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.