Valuing Bets and Hedges: Implications for the Construct of Risk Preference

Judgment and Decision Making, Vol. 13, No. 6, November 2018, pp. 501–508

8 Pages Posted: 22 Aug 2019

See all articles by Shane Frederick

Shane Frederick

Yale School of Management

Amanda Levis

The Vanguard Group, Inc.

Steven G. Malliaris

University of Georgia - Department of Banking and Finance

Andrew Meyer

University of Chicago - Center for Decision Research

Date Written: November 30, 2018

Abstract

Risk attitudes implied by valuations of risk-increasing assets depart markedly from those implied by valuations of risk-reducing assets. For instance, many are unwilling to pay the expected value for a risky asset or for its perfect hedge. Although nearly every theory of risk preference (and logic) demands a negative correlation between valuations of bets and hedges, we observe positive correlations. This inconsistency is difficult to expunge.

Keywords: bets, hedges, risk attitude

JEL Classification: G11, G40

Suggested Citation

Frederick, Shane and Levis, Amanda and Malliaris, Steven G. and Meyer, Andrew, Valuing Bets and Hedges: Implications for the Construct of Risk Preference (November 30, 2018). Judgment and Decision Making, Vol. 13, No. 6, November 2018, pp. 501–508, Available at SSRN: https://ssrn.com/abstract=3439761

Shane Frederick

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Amanda Levis

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

Steven G. Malliaris (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Andrew Meyer

University of Chicago - Center for Decision Research ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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