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Prospect Theory and Risk-Seeking Behavior by Troubled Firms

September 23, 2011 Leave a comment

Prospect Theory and Risk-Seeking Behavior by Troubled Firms

Journal of Behavioral Finance
Volume 12, Issue 1, 2011, pages 29-40

Doron Kligera & Iris Tsurb

Abstract

We employ Prospect Theory (PT, Kahneman and Tversky [1979]) to explain the relationship between risk and return at the organization level. Our modeling approach addresses shortcomings in previous research approaches. We suggest an alternative approach for inferring the reference point, a key element of PT, and measuring risk, as well as a different representation of the risk-return association taking into consideration a timeline of the firm’s state, its state dependent action, and consequences. Consistent with PT, results using COMPUSTAT data show that firms with returns above their reference levels take less risk than firms with returns below their reference levels.

Keywords : Prospect theory, Organization level, Reference point, Risk preferences, Strategic decision making

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Motivational systems in adolescence: Possible implications for age differences in substance abuse and other risk-taking behaviors

September 16, 2011 Leave a comment

Motivational systems in adolescence: Possible implications for age differences in substance abuse and other risk-taking behaviors

Tamara L. Doremus-Fitzwater, Elena I. Varlinskaya, Linda P. Spear

Brain and Cognition
Volume 72, Issue 1, February 2010, Pages 114-123
Adolescent Brain Development: Current Themes and Future Directions

Abstract
Adolescence is an evolutionarily conserved developmental phase characterized by hormonal, physiological, neural and behavioral alterations evident widely across mammalian species. For instance, adolescent rats, like their human counterparts, exhibit elevations in peer-directed social interactions, risk-taking/novelty seeking and drug and alcohol use relative to adults, along with notable changes in motivational and reward-related brain regions. After reviewing these topics, the present paper discusses conditioned preference and aversion data showing adolescents to be more sensitive than adults to positive rewarding properties of various drugs and natural stimuli, while less sensitive to the aversive properties of these stimuli. Additional experiments designed to parse specific components of reward-related processing using natural rewards have yielded more mixed findings, with reports of accentuated positive hedonic sensitivity during adolescence contrasting with studies showing less positive hedonic affect and reduced incentive salience at this age. Implications of these findings for adolescent substance abuse will be discussed.

Keywords: Adolescence; Animal model; Motivation; Reward; Drug use

Categories: Risk-Taking

The Presence of an Attractive Woman Elevates Testosterone and Physical Risk Taking in Young Men

August 6, 2011 Leave a comment

The Presence of an Attractive Woman Elevates Testosterone and Physical Risk Taking in Young Men

Social Psychological and Personality Science
January 2010 vol. 1 no. 1 57-64

Richard Ronay
William von Hippel

Abstract

The authors report a field experiment with skateboarders that demonstrates that physical risk taking by young men increases in the presence of an attractive female. This increased risk taking leads to more successes but also more crash landings in front of a female observer. Mediational analyses suggest that this increase in risk taking is caused in part by elevated testosterone levels of men who performed in front of the attractive female. In addition, skateboarders’ risk taking was predicted by their performance on a reversal-learning task, reversal-learning performance was disrupted by the presence of the attractive female, and the female’s presence moderated the observed relationship between risk taking and reversal learning. These results suggest that men use physical risk taking as a sexual display strategy, and they provide suggestive evidence regarding possible hormonal and neural mechanisms.

Categories: Risk-Taking

When fairness neither satisfies nor motivates: The role of risk aversion and uncertainty reduction in attenuating and reversing the fair process effect

July 22, 2011 Leave a comment

When fairness neither satisfies nor motivates: The role of risk aversion and uncertainty reduction in attenuating and reversing the fair process effect

Organizational Behavior and Human Decision Processes
Article in Press

Sreedhari D. Desai Harris Sondak and Kristina A. Diekmann

Abstract
It is widely acknowledged that procedural justice has many positive effects. However, some evidence suggests that procedural justice may not always have positive effects and may even have negative effects. We present three studies that vary in method and participant populations, including an archival study, a field study, and an experiment, using data provided by the general American population, Indian software engineers, and undergraduate students in the US. We demonstrate that key work-related variables such as people’s job satisfaction and performance depend on procedural justice, perceived uncertainty, and risk aversion such that risk seeking people react less positively and at times negatively to the same fair procedures that appeal to risk averse people. Our results suggest that one possible reason for these effects is that being treated fairly reduces people’s perception of uncertainty in the environment and while risk averse people find low uncertainty desirable and react positively to it, risk seeking people do not. We discuss the implications of our findings for theories of procedural justice including the uncertainty management model of fairness, the fair process effect, and fairness heuristic theory.

Highlights
► We examine effects of procedural justice on job performance and satisfaction. ► We find that procedural justice may sometimes fail to lead to positive effects. ► In particular, risk seekers are less likely to respond positively to fairness. ► We argue that bring treated fairly reduces perceived uncertainty. ► Risk seekers dislike this reduction in uncertainty.

Keywords: Procedural justice; Uncertainty; Risk aversion; Performance; Job satisfaction

Categories: Risk-Taking

Gender differences in competitiveness and risk taking: comparing children in Colombia and Sweden

Gender differences in competitiveness and risk taking: comparing children in Colombia and Sweden

Journal of Economic Behavior & Organization
Article in Press, Accepted Manuscript

Juan-Camilo Cárdenas, Anna Dreber, Emma von Essen and Eva Ranehill

Abstract
We explore gender differences in preferences for competition and risk among children aged 9-12 in Colombia and Sweden, two countries differing in gender equality according to macro indices. We include four types of tasks that vary in gender stereotyping when looking at competitiveness: running, skipping rope, math and word search. We find that boys and girls are equally competitive in all tasks and all measures in Colombia. Unlike the consistent results in Colombia, the results in Sweden are mixed, with some indication of girls being more competitive than boys in some tasks in terms of performance change, whereas boys are more likely to choose to compete in general. Boys in both countries are more risk taking than girls, with a smaller gender gap in Sweden.

Keywords: competitiveness; risk preferences; children; gender differences; experiment.

Categories: Risk-Taking

The gender effect in risky asset holdings1☆

The gender effect in risky asset holdings1☆

Journal of Economic Behavior & Organization

We study the relation between gender and stock holdings in Finland, a particularly gender equal country. We show that it is crucial to control for risk aversion using a measure of subjective risk-taking, rather than measures derived from abstract gambles. Controls related to financial knowledge and resources also explain the gender difference. The residual effect of the male gender on the conditional equity share, after all appropriate controls, is 3 percentage points and statistically significant. The effect on stock market participation on the other hand is close to zero or negative, so men contribute more to the nonparticipation puzzle conditional on covariates. The gender difference mainly works through women’s higher risk aversion, which we find extends to finance professionals and wealthy private banking customers.

 Keywords: risk preferences; portfolio choice; gender difference
Author Keywords: G11, D81, J16

star, open1We thank two anonymous referees, the editor (Rachel Croson), Markku Lanne, Elias Rantapuska, as well as the participants in the MOVE (Markets, Organizations and Votes in Economics) Workshop on Gender Differences in Competitiveness and Risk Taking in Barcelona, 2010, for comments, and Wei Li and Niklas Jahnsson for research assistance. This research was supported by the Academy of Finland, aivoAALTO project, OP Bank Group Research Foundation, and the Finnish Foundation for Advancement of Securities Markets.

Categories: Risk-Taking

Deciding to Decide: Gender, Leadership and Risk-Taking in Groups

June 30, 2011 Leave a comment

Deciding to Decide: Gender, Leadership and Risk-Taking in Groups

Journal of Economic Behavior & Organization
Article in Press, Accepted Manuscript

Seda Ertaca, and Mehmet Y. Gurdalb

Abstract
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.

Keywords: gender; group decision-making; risk; leadership; experiments.

Categories: Leadership, Risk-Taking