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
Date Written: November 30, 2018
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