Structured finance is often mentioned as the main cause of the latest financial crisis. We argue that structured finance per se did not trigger the last financial crisis. The crisis was propagated around the world because of poor risk management such as agency problems in the securitization...

Assuming a risk-neutral bank and assuming household utility to be exponential, we show how under information symmetry the covariance of income and loan repayments may explain higher household borrowings than in the case without default option. Under ex post information asymmetry and positive...

We provide a preference-based rationale for endogenous overconfidence. Horizon-dependent risk aversion, combined with a possibility to forget, can generate overconfidence and excessive risk taking in equilibrium. An "anxiety prone" agent, who is more risk-averse to imminent than to distant...

This paper analyzes experimentally whether responsibility sharing can reduce the emotionally motivated aspiration to bias beliefs toward previous decisions and whether this influences the subsequent investment behavior. The results suggest that decision-makers tend to form beliefs that justify...

We provide a model that can explain empirically relevant variations in confidence and risk taking by combining horizon-dependent risk aversion (“anxiety”) and selective memory in a Bayesian intrapersonal game. In the time series, overconfidence is more prevalent when actual risk levels are...

In this work we asked if risk attitudes influence the way agents learn in a probabilistic environment. For that purpose, 31 male students played a version of a well-known game called the multi-armed bandit (with four levers/buttons). We found that after controlling for cognitive abilities (i.e....

How do lifetime experiences of macroeconomic risk shape attitudes towards risk? We study this question theoretically and empirically for individuals in developing countries. We build a Bayesian model of choice in which agents' risk attitude adapts to their evolving beliefs about background risk....

Given their reference point, most people tend to be risk averse over gains and risk seeking over losses. Therefore, they exhibit a dual risk attitude which is reference dependent. This paper studies an adaptive process for choice under risk where, while maintaining reference-dependent...

Do people know their own risk preferences, or do risk choices change with experience and observation? We provide a clean and straightforward test in the laboratory. People make an initial decision concerning a lottery choice and then experience 24 practice periods in which they roll the dice,...

Let α denote risk preference parameters, such that α→0 (respectively, α→Z0) implies tatonnement towards risk seeking preferences (respectively, risk aversion). Suppose either of two agents, i and j enter into a market with risk preference parameters, α₀(i)=0.1 or α₀(j)=Z-0.1. With T...