Risk Aversion in Decision Making: An Exploration Through Three Studies
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Authors
Karapetian, Armina S.
Issue Date
2024
Type
Dissertation
Language
Keywords
Decision Making Under Risk , Investor Behavior , Neuroeconomics , Nudge , Risk Aversion , Social Influence
Alternative Title
Abstract
This dissertation embarks on an explorative journey into the multifaceted concept of risk aversion, a trait evident across both human and animal behaviors, suggesting its evolutionary roots and significant impact on decision-making processes. Originating from the 18th century with Daniel Bernoulli's foundational calculations, the study of risk has evolved, highlighting individual variances in risk preferences and the factors influencing these preferences. Amidst the backdrop of economic and psychological theories, including expected utility theory (EUT) and prospect theory, this research delves into the dichotomy of risk aversion—its inherent nature versus its susceptibility to external influences such as social context and personal experiences. Spanning three empirical studies, this dissertation adopts a comprehensive approach, utilizing online surveys, computer laboratory experiments, and electroencephalography (EEG) laboratory experiments to further our understanding of the phenomenon of risk aversion. The first study examines social influence on risk behaviors through a series of experiments, uncovering the significant impact of perceived majority decisions on individual risk-taking, especially within relatable peer groups. This finding challenges the traditional utility models by demonstrating the social dimension's role in financial decision-making. The second study addresses the prevalent issue of excessive trading among investors, proposing a behavioral nudge aimed at refocusing attention on long-term gains rather than short-term fluctuations. This intervention, inspired by the theories of Markowitz and Sharpe that suggest an investment portfolio should be tailored to an investor's risk tolerance resulting in a predominantly passive investment strategy, tests the hypothesis that a long-term perspective can enhance investment outcomes and offering practical implications for retirement savings strategies. The third study ventures into the neuroeconomics realm to investigate the nature versus nurture debate concerning risk preferences. Through neuroeconomic methodologies, it explores the neural underpinnings of loss aversion and the physiological variations correlating with risk aversion levels. This interdisciplinary study aims to bridge the gap between neurobiological insights and economic and psychological theories, enriching our understanding of risk aversion's underpinnings. Collectively, these studies contribute to a deeper comprehension of risk aversion, proposing innovative strategies for decision-making improvement and policy development, thereby enriching the discourse on economic and psychological behavior modeling.