The economy and attitudes toward risk

On the often-interesting judgment and decision making listserv, George Christopoulos wrote:

It seems that in situations similar to the present economic situation economic agents are less willing to take risks and instead they prefer safer options.

Could somebody point to studies that show this negative relationship between depression /recession (or when generally when wealth resources are low) and increased (relative?) risk aversion?

There were a couple of responses on the list, but they seemed to me to miss the point slightly. The respondents referred to econ literature on stock market trading and on wealth and economic decision making, but my impression was that Christopoulos was looking for something more psychological: something like a meta-analysis of studies of uncertainty aversion (I prefer to avoid the term “risk aversion” or even “loss aversion,” for reasons I’ve discussed at length on this blog) over time, to see if subjects in an identical experiment show more uncertainty aversion in bad times than good.

The next step would be to analyze such data to separate out, to the extent possible, effects of individual economic status and national trends. The hypothesis might be that both have effects: that people suffering personal reversals might show more uncertainty aversion, and that, on top of this, everyone might tend to show more uncertainty aversion during economic downturns.

Could be an interesting study, although I doubt that such data are available.

4 thoughts on “The economy and attitudes toward risk

  1. Economists mostly treat risk behavior as being a function of household wealth. What you describe sounds like state dependent risk behavior. That would probably come from state dependent utility, when the utility you get is dependent on not just the outcome but also regret and other outside influences that are not part of the normal choice set.

    I don't know of much exploration in this area, and I wonder if modeling tractability has held up research in this area for I'm just ignorant of it.

  2. > psychological: … studies of uncertainty
    > aversion

    CS Peirce wrote some interesting theoretical stuff (late 1800s?) arguing that those who were reinforced by being risky in good economic times would be "unable" to change (quickly) in poor economic times "persisting" (for too long) in past behaviours that used to be rewarding…

  3. How about looking at spending on gambling? Lotteries, slot machines etc. Perhaps the Consumer Expenditure Survey might have some data on household spending on gambling.

  4. I just saw that comment by Andrew. Andrew is partially correct. I was looking for data that show that risk aversion changes as a function of wealth. I say partially because the underlying reasons could be a combination of psychological and economic factors. Actually, Arrow and Pratt do make the theoretical prediction that risk attitudes should change as a wealth changes. Animals do that and there are a bunch of studies on this. Hence my question. But Andrew is correct on his idea to have a metaanalysis of studies across decades.

    Anonymous throws the interesting idea that it might be an issue of learning / adaptation. This is indeed another interesting question to explore.

    bccheah do you know how can I have access to such data?

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