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.

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