Type of Publication: Working paper

Risk preferences and economic shocks: Experimental evidence

Author(s):

Dorlöchter, Jonas; Amann, Erwin

Publication Date:

2021

Keywords:

risk preference, return and risk perception, exogenous/economic shock, experiment

Fulltext:

Risk preferences and economic shocks: Experimental evidence (1.22 MB)

Link to complete version:

http://ssrn.com/abstract=3522385

Citation:

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Abstract

Abstract

We demonstrate in our experiment that an exogenous shock does not lead to increasing risk aversion, and has ultimately no significant impact on investors’ risk preference in general. To do so, we keep subjects’ risk and return expectations fixed and focus solely on loss in wealth. As a theoretical framework, we use the expected utility approach and take the class of HARA-utility functions to analyse subjects’ preferences. Particularly, our methodical approach affords insights into the impact of economic fluctuations on investors’ risk-taking and the measurement of risk preferences per se. We conclude that cautious investment behavior after an economic crisis might rather be due to changes in the perception of risk and return. Moreover, we give evidence that, in general, it is not sufficient to explain investors’ risk-taking solely by preferences.