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

Frederick, Shane; Levis, Amanda; Malliaris, Steven G.; Meyer, Andrew

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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

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: 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