Risk aversion and under-hedging

Tal Shavit, Uri Benzion, Ernan Haruvy

Research output: Contribution to journalArticlepeer-review

Abstract

In a series of experiments, subjects allocate an endowment between assets. One of the assets, a bond or a composite asset, is dominated by a combination of two volatile assets. We explore settings and preferences that result in the dominated asset being chosen. The results show that subjects persist in allocating a significant portion of their funds to the dominated asset after 200 rounds. This finding can be explained by risk-averse investors' inability to treat a combination of assets as a single distribution of payoffs. We find that risk-averse investors are more likely to persist in choosing dominated assets.

Original languageEnglish
Pages (from-to)181-198
Number of pages18
JournalJournal of Economics and Business
Volume59
Issue number3
DOIs
StatePublished - 1 May 2007
Externally publishedYes

Keywords

  • Experiments
  • Hedging
  • Risk

ASJC Scopus subject areas

  • General Business, Management and Accounting
  • Economics and Econometrics

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