Up Close It Feels Dangerous: 'Anxiety' in the Face of Risk

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractMotivated by individuals' emotional response to risk at different time horizons, we model an 'anxious' agent-one who is more risk averse with respect to imminent risks than distant risks. Such preferences describe well-documented features of 1) individual behavior, 2) equilibrium prices, and 3) institutions. In particular, we derive implications for financial markets, such as overtrading and price anomalies around announcement dates, as well as a downward-sloping term structure of risk premia, which are found empirically. Since such preferences can lead to dynamic inconsistencies with respect to risk trade-offs, we show that costly delegation of investment decisions is a strategy used to cope with 'anxiety.'

The term structure of returns: Facts and theory

“…We conclude with a discussion explanations based on market microstructure noise or taxation. Eisenbach and Schmalz (2014) propose to modify preferences so that the representative agent is more risk averse with respect to imminent risks than distant risks. Such preferences find support in a series of lab experiments.…”

Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty

“…As discussed in Eisenbach and Schmalz (2014), introducing horizon-dependent risk aversion into a time separable model with more than two periods necessarily introduces horizon-dependent inter-temporal tradeo↵s similar to quasi-hyperbolic discounting. This is undesirable, as we want to study the e↵ects of horizon-dependent risk aversion in isolation.…”

“…Consumption in the two periods is i.i.d. Denoting the prices of the two assets by p 0 and p 1 , respectively, the first-order conditions for the agent's portfolio choice yield: Eisenbach and Schmalz (2014) show the equilibrium prices p 0 , p 1 and r satisfy:…”

“…Inspired by ample experimental evidence that subjects are more risk averse to immediate than to delayed risks, 1 Eisenbach and Schmalz (2014) introduce a two-period model with horizon-dependent risk aversion and show it is conceptually orthogonal to other non-standard preferences such as non-exponential time discounting (Phelps and Pollak, 1968;Laibson, 1997), time-varying risk aversion (Constantinides, 1990;Campbell and Cochrane, 1999), and a preference for the timing of resolution of uncertainty (Kreps and Porteus, 1978;Epstein and Zin, 1989, (EZ)). In the present paper, we investigate the impact of horizon-dependent risk aversion preferences on asset prices in a dynamic framework.…”

Anxiety, Overconfidence, and Excessive Risk Taking

“…We assume that the agent exhibits higher risk aversion for imminent than for distant risks, i.e. horizon-dependent risk aversion (Eisenbach and Schmalz, 2014). An anxiety-prone decision maker prefers risky gambles with sufficiently high returns to safer alternatives as long as they are temporally distant, but reconsiders such risk-taking decisions as the risks approach and the agent gets "chickens out".…”