Cancer premiums and latency effects: A risk tradeoff approach for valuing reductions in fatal cancer risks

Many studies estimate individuals’ values for avoiding fatality risks; however, most value-of-statistical-life studies focus on accident-related deaths. Consequently, little is known about preferences for avoiding other fatal risks, such as cancer. Cancer may engender strong feelings of dread, leading to a “cancer premium,” but cancer latency periods may have the opposite effect. Using a national survey, we elicit relative preferences for avoiding fatal cancer and auto-accident risks. We find strong preferences for avoiding cancer risks. With a 5-year latency, they are valued roughly three times greater than immediate accident risks, declining to 50% greater for a 25-year latency.

Risk aversion,downside risk aversion,and the transition to entrepreneurship

In this paper, we discuss the transition from secure employment to risky self-employment (entrepreneurship) caused by a small increase in wealth. Building on the apportioning risk literature, we prove that the transition from secure employment to risky entrepreneurship is based on a measure of the difference between the strength of downside risk aversion and the strength of risk aversion. This result highlights the idea that using the behavioral approach of risky lotteries to study entrepreneurship can produce different results from the traditional economic theory of entrepreneurship, which can have policy implications that must be considered with caution.

     

Decreasing absolute risk aversion, prudence and increased downside risk aversion

Downside risk increases have previously been characterized as changes preferred by all decision makers u(x) with u????(x) > 0. For risk averse decision makers, u????(x) > 0 also defines prudence. This paper finds that downside risk increases can also be characterized as changes preferred by all decision makers displaying decreasing absolute risk aversion (DARA) since those changes involve random variables that have equal means. Building on these findings, the paper proposes using ??more decreasingly absolute risk averse?? or ??more prudent?? as alternative definitions of increased downside risk aversion. These alternative definitions generate a transitive ordering, while the existing definition based on a transformation function with a positive third derivative does not. Other properties of the new definitions of increased downside risk aversion are also presented.     

Valuing risks of death from terrorism and natural disasters

This paper uses a random utility model to examine stated preferences for the valuation of public risks of fatalities from terrorist attacks and natural disasters. Traffic-related deaths serve as the common reference point in two series of pairwise risk-risk tradeoff choices. Even after taking into account differences in respondent risk beliefs, the nationally representative sample values the prevention of terrorism deaths almost twice as highly as preventing natural disaster deaths and at about the same level as preventing deaths from traffic accidents, which pose greater personal risk. Education, seatbelt usage, political preferences, and terrorism risk beliefs affect valuations in the expected manner.

Joint measurement of risk aversion,prudence, and temperance

Risk aversion—but also the higher-order risk preferences of prudence and temperance—are fundamental concepts in the study of economic decision making. We propose a method to jointly measure the intensity of risk aversion, prudence, and temperance. Our theoretical approach is to define risk compensations of different orders, and in an experiment we elicit these compensations with a price list technique. We find evidence for risk aversion, prudence, and temperance. These traits correlate within subjects. The compensations elicited for prudence are significantly larger than those for risk aversion and temperance. In contrast to commonly used utility functions, prospect theory can predict this behavioral pattern. In our experiment, risk-averse, risk-loving, and risk-neutral subjects are prudent. This supports a recent theoretical observation that prudence may be a more universal trait than previously realized.     

On risk aversion,classical demand theory,and KM preferences

Building on Kihlstrom and Mirman (Journal of Economic Theory, 8(3), 361–388, 1974)’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer’s maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision.     

Absolute and relative risk aversion: An experimental study

Kenneth Arrow posed the hypotheses that investors reveal decreasing absolute risk aversion (DARA) and increasing relative risk aversion (IRRA). It is very difficult to empirically test these two hypotheses since one needs to analyze an investor's investment decisions at various points in his/her economic life cycle as the investor's wealth varies. An experimental study is conducted to test these two hypotheses when the subject's wealth varies depending on his/her investment performance. The experiment involves an actual money gain or loss which is indexed to the individual's investment performance. It is found that DARA is indeed strongly supported, but IRRA is rejected.     

The impact of risk aversion and ambiguity aversion on annuity and saving choices

Journal of Risk and Uncertainty - We analyze the impact of risk aversion and ambiguity aversion on the competing demands for annuities and bequeathable savings using a lifecycle recursive utility...     

Mixed risk aversion and preference for risk disaggregation: a story of moments

In a recent article entitled “Putting Risk in its Proper Place,” Eeckhoudt and Schlesinger (2006) established a theorem linking the sign of the n-th derivative of an agent’s utility function to her preferences among pairs of simple lotteries. We characterize these lotteries and show that, in a given pair, they only differ by their moments of order greater than or equal to n. When the n-th derivative of the utility function is positive (negative) and n is odd (even), the agent prefers a lottery with higher (lower) n + 2p-th moments for p belonging to the set of positive integers. This result links the preference for disaggregation of risks across states of nature to the complete structure of moments preferred by mixed risk averse agents. It can be viewed as a generalization of a proposition appearing in Ekern (1980) which focused only on the differences in the n-th moments.     

Willingness to pay for mortality risk reductions: Does latency matter?

Using results from two contingent valuation surveys conducted in Canada and the U.S., we explore the effect of a latency period on willingness to pay (WTP) for reduced mortality risk using a structural model. We find that delaying the time at which the risk reduction occurs by 10 to 30 years reduces WTP by more than 60% for respondents in both samples aged 40 to 60 years. The implicit discount rates are equal to 3.0–8.6% for Canada and 1.3–5.6% for the U.S. JEL Classification Q51 · Q58 The findings, interpretations and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the USEPA or of the World Bank, its Executive Directors or the countries they represent.     

Time preferences and risk aversion: Tests on domain differences

Understanding how individuals discount and evaluate the risks of environmental outcomes is a prime component in designing effective environmental policy. We use an incentivized experimental design to investigate whether subjects’ time preferences and risk aversion across the monetary and environmental domains differ. We find that subjects’ time preferences are not significantly different across the two domains. In contrast, subjects exhibit a higher degree of risk aversion in the environmental domain. Furthermore, we corroborate earlier results, documenting that women are more risk averse than men in the monetary domain, and show this finding to also hold in the environmental domain.     

Catastrophe avoidance and risk aversion: Implications of formal utility maximization

It is shown that von Neumann-Morgernstern (NM) expected utility maximization, as is currently practised, implies an upper bound on the percentage utility that can be sacrificed to reduce the probability or severity of a catastrophe. The major quantitative result of this paper is a simple tabular (and graphic) presentation of the maximum allowed budget for catastrophe prevention/abatement within the NM framework. The upper limit, which declines in proportion to catastrophe probability, effectively reduces the benefit-cost ratio for catastrophe protection. Use of formal utility maximization methods can thus result in the choice of policies that fail to avoid catastrophes that could be avoided at relatively low cost. Thus the decisions of risk-averse, risk-neutral, and risk-seeing utility maximizers tend to converge in catastrophe prone situations. The prospect theory of Kahneman and Tversky or the elasticity principle of Bernard offer more flexible options of risk aversion under these circumstances.Professor of Engineering and Public Policy, Carnegie-Mellon University, Pittsburgh.PhD candidate in Engineering and Public Policy, Carnegie-Mellon University, Pittsburgh and Assistant Professor, College of Business Administration, University of Nevada, Reno.     

Ross' measure of risk aversion and portfolio selection

This article shows that if Ross' definition of riskier is replaced by a more traditional definition, such as a mean-preserving spread or second-degree stochastic dominance, then the application of Ross's stronger measure of risk aversion to the portfolio problem may no longer produce the desired result. It is also shown that the stronger measure may not perform satisfactorily when applied to exponential utility functions.The authors are grateful to John Pratt for his helpful comments.     

Valuing mortality risk in China: Comparing stated-preference estimates from 2005 and 2016

Journal of Risk and Uncertainty - We estimate the marginal rate of substitution of income for reduction in current annual mortality risk (the “value per statistical life” or VSL) using...     

Measures of risk aversion with expected and nonexpected utility

In the expected utility case, the risk-aversion measure is given by the Arrow-Pratt index. Three proposals of a risk-aversion measure for the nonexpected utility case are examined. The first one sets “the second derivative of the acceptance frontier as a measure of local risk aversion.” The second one takes into account the concavity in the consequences of the partial derivatives of the preference function with respect to probabilities. The third one measures risk aversion through the ratio between the risk premium and the standard deviation of the lottery. The third proposal catches the main feature of risk aversion, while the other two proposals are not always in accordance with the same crude definition of risk aversion, by which there is risk aversion when an agent prefers to get the expected value of a lottery rather than to participate in it.     

Unions,employment risks,and market provision of employment risk differentials

The role of unions in providing compensating differentials for wage and hours risk is analyzed. Unions are shown to increase wages for workers in more risky jobs. A negative compensating differential for nonunion workers is taken as evidence of worker-specific, or supply-side risk. This component of risk is removed by controlling for union status, based on the belief that unionized firms will be more likely to filter out high-risk unproductive workers. Hours risk is compensated for in the labor market, while wage risk is not.     

Positivity of bid-ask spreads and symmetrical monotone risk aversion*

A usual argument in finance refers to no arbitrage opportunities for the positivity of the bid-ask spread. Here we follow the decision theory approach and show that if positivity of the bid-ask spread is identified with strong risk aversion for an expected utility market-maker, this is no longer true for a rank-dependent expected utility one. For such a decision-maker only a very weak form of risk aversion is required, a result which seems more in accordance with his actual behavior. We conclude by showing that the no-trade interval result of Dow and Werlang (1992a) remains valid for a rank-dependent expected utility market-maker merely exhibiting this weak form of risk aversion.     

An Iterative Choice Approach to Valuing Clean Lakes,Rivers, and Streams

This article introduces an iterative choice procedure for valuing inland water quality. This approach breaks up the valuation into a series of component tasks. The water quality ladder approach is not valid empirically. Consequently, respondents in Colorado and North Carolina assessed the value of making water quality rated good by EPA, which has a value of $22.40 per additional percent improvement. Nonuse and probabilistic use are highly valued. The results also indicate how water quality valuations differ for aquatic environment, edible fish, and swimming, as well as for water that is cloudy, smelly, or polluted by toxics. Minorities are particularly likely to rely upon monitorable water quality attributes.     

Valuing publicly sponsored research projects: Risks,scenario adjustments,and inattention

Survey-based choice scenarios used to value non-market public goods typically preclude any risk that the benefits described may not be delivered. Our survey specifies explicit risks of (a) outright program failure and (b) program redundancy due to possible private sector substitutes. Additionally, most analyses assume that survey subjects fully accept these scenarios and that all provided information receives their complete attention. Our discounted expected utility model of choice accommodates both these objective risks and the possibility of subjective scenario adjustment or selective inattention by respondents. We then counterfactually simulate willingness-to-pay in the absence of these distortions.

Compensating wage differentials for fatal injury risk in Australia,Japan, and the United States

Our research infers the effects of institutionalized wage setting and lengthy worker-firm attachment by comparing estimated compensating wage differentials for fatal injury risk in Japanese, Australian, and U.S. manufacturing. Hedonic labor market equilibrium regressions for Japan reveal a statistically fragile compensating wage differential of 0% to 1.4% for exposure to the average fatality risk compared to employment in a perfectly safe workplace. Australian workers receive a statistically robust 2.5% estimated wage premium. Using new data on work-related fatalities, we find a 1% compensating wage differential in U.S. manufacturing that becomes more positive and statistically less significant as data are aggregated.