The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

Ethnologue: Languages of the World

The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (1) nonstandard prefer- ences, (2) nonstandard beliefs, and (3) nonstandard decision making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from charitable giving to labor supply. In the class of nonstandard preferences, I discuss time preferences (self-control problems), risk preferences (reference depen- dence), and social preferences. On nonstandard beliefs, I present evidence on overcon- fidence, on the law of small numbers, and on projection bias. Regarding nonstandard decision making, I cover framing, limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors—firms, employers, CEOs, investors, and politicians—respond to the nonstandard behavior described in the survey. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the nonstandard features.

/pdf/psychology-and-economics-evidence-from-the-field-518as6novo.pdf

Psychology and Economics: Evidence from the Field

Handbook of the Economics of Finance

This paper explores the role that misdirected bank lending played in prolonging the Japanese macroeconomic stagnation that began in the early 1990s. The investigation focuses on the wide spread practice of Japanese banks of continuing to lend to otherwise insolvent firms. We docu ment the prevalence of this forbearance lending and show its distorting effects on healthy firms that were competing with the impaired firms. The paper by Hoshi (2000) was the first to call attention to this phenomenon, and its ramifi

/pdf/zombie-lending-and-depressed-restructuring-in-japan-3rnedjuzek.pdf

Zombie Lending and Depressed Restructuring in Japan

We use data on households’ deductible choices in auto and home insurance to estimate a structural model of risky choice that incorporates "standard" risk aversion (concave utility over …nal wealth), loss aversion, and nonlinear probability weighting. Our estimates indicate that nonlinear probability weighting plays the most important role in explaining the data. More speci…cally, we …nd that standard risk aversion is small, loss aversion is nonexistent, and nonlinear probability weighting is large. When we estimate restricted models, we …nd that nonlinear probability weighting alone can better explain the data than standard risk aversion alone, loss aversion alone, and standard risk aversion and loss aversion combined. Our main …ndings are robust to a variety of modeling assumptions. JEL classi…cations: D01, D03, D12, D81, G22

/pdf/the-nature-of-risk-preferences-evidence-from-insurance-64iewpxdvp.pdf

The Nature of Risk Preferences: Evidence from Insurance Choices

This paper contributes to the literature on cross-country income differences by studying the effect of entry barriers on productivity and output Using instrumental variable regressions I show that higher entry costs significantly reduce output per worker and that they do so by lowering total factor productivity In particular, an increase in entry costs by 80% of income per capita, which is one half of their standard deviation in my sample, is estimated to decrease total factor productivity and output per worker by 22% and 29%, respectively

Entry costs and cross-country differences in productivity and output

We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates 'standard' risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions - characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes - play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.

/pdf/the-nature-of-risk-preferences-evidence-from-insurance-30f8re2f9n.pdf

Using a unique data set, we test whether households' deductible choices in auto and home insurance reflect stable risk preferences. Our test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household-coverage specific Poisson processes. We find that the hypothesis of stable risk preferences is rejected by the data. Our analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices. We find that our results are robust to several alternative modeling assumptions.

Are Risk Preferences Stable Across Contexts? Evidence from Insurance Data

Using a unique dataset, we test whether households' deductible choices in auto and home insurance reflect stable risk preferences. Our test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household-coverage specific Poisson processes. We find that the hypothesis of stable risk preferences is rejected by the data. Our analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices. Our results are robust to several alternative modeling assumptions. (JEL D11, D83)

/pdf/are-risk-preferences-stable-across-contexts-evidence-from-2xyl7dwh1z.pdf

Levon Barseghyan

Papers

The Nature of Risk Preferences: Evidence from Insurance Choices

Entry costs and cross-country differences in productivity and output

The Nature of Risk Preferences: Evidence from Insurance Choices

Are Risk Preferences Stable Across Contexts? Evidence from Insurance Data

Are Risk Preferences Stable Across Contexts? Evidence from Insurance Data