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The Relationship Between Risk Attitude and Strength of Preference: A Test of Intrinsic Risk Attitude

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  • Ale Smidts

    (Erasmus University, Rotterdam School of Management, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands)

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    Abstract

    In a field study, the concept of intrinsic risk attitude is investigated. Intrinsic risk attitude concerns the relationship between risk attitude, measured by the utility function u(x), and strength of preference, measured by the value function v(x). We study farmers' decision-making vis-à-vis price risk and obtain assessments of risk attitude and strength of preference in two consecutive years in a sample of 253 respondents. This design enables us to investigate the temporal stability of intrinsic risk attitude. Our findings show that risk attitude and strength of preference are two distinctive constructs. More specifically, the hypothesis of a linear relationship between u(x) and v(x) is clearly rejected in favor of an exponential relationship. This exponential relationship implies that our respondents exhibit a constant absolute intrinsic risk attitude for different price levels, during a time period. Differences between respondents in direction and degree of intrinsic risk attitude are substantial and the majority of the respondents are intrinsically risk seeking. No statistically significant change in intrinsic risk attitude could be detected between the two years of measurement. However, the correlation between measures across time appears to be low. In the discussion, issues for further research are identified.

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    File URL: http://dx.doi.org/10.1287/mnsc.43.3.357
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 43 (1997)
    Issue (Month): 3 (March)
    Pages: 357-370

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    Handle: RePEc:inm:ormnsc:v:43:y:1997:i:3:p:357-370

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    Keywords: decision analysis; utility theory; utility assessment; value assessment; relative risk aversion;

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    Cited by:
    1. Pennings, J.M.E. & Smidts, A., 2002. "The Shape of Utility Functions and Organizational Behavior," ERIM Report Series Research in Management ERS-2002-18-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    2. Scott Fausti & Jeffrey Gillespie, 2006. "Measuring risk attitude of agricultural producers using a mail survey: how consistent are the methods?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), pages 171-188, 06.
    3. Pennings, Joost M. E., 2002. "Pulling the trigger or not: Factors affecting behavior of initiating a position in derivatives markets," Journal of Economic Psychology, Elsevier, vol. 23(2), pages 263-278, April.
    4. Pennings, Joost M.E. & Garcia, Philip, 2004. "Strategic Risk Management Behavior: What Can Utility Functions Tell Us?," 2004 Annual meeting, August 1-4, Denver, CO 20388, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Franken, Jason R.V. & Pennings, Joost M.E. & Garcia, Philip, 2012. "Measuring Risk Attitude and Relation to Marketing Behavior," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124471, Agricultural and Applied Economics Association.
    6. Pennings, Joost M.E. & Garcia, Philip & Irwin, Scott H. & Good, Darrel L., 2003. "How To Group Market Participants? Heterogeneity In Hedging Behavior," 2003 Annual meeting, July 27-30, Montreal, Canada 21963, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Michael Happich & Axel Muehlbacher, 2003. "An exponential representation of health state utility," The European Journal of Health Economics, Springer, vol. 4(4), pages 292-294, December.
    8. Stefan Zeisberger & Dennis Vrecko & Thomas Langer, 2012. "Measuring the time stability of Prospect Theory preferences," Theory and Decision, Springer, vol. 72(3), pages 359-386, March.
    9. Joost M.E. Pennings & Raymond M. Leuthold, 1999. "Commodity Futures Contract Viability: A Multidisciplinary Approach," Finance 9905002, EconWPA.
    10. Joost M.E. Pennings & Philip Garcia, 2009. "The informational content of the shape of utility functions: financial strategic behavior," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 83-90.
    11. Katerina Straznicka, 2012. "Temporal stability of risk preference measures," Working Papers halshs-00768437, HAL.
    12. Csanaky, András & Ulbert, József, 2004. "Kockázatészlelés és kockázati magatartás
      [Risk testing and risk behaviour]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 235-258.
    13. Schade, Christian & Schroeder, Andreas & Krause, Kai Oliver, 2010. "Coordination after gains and losses: Is prospect theory’s value function predictive for games?," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 59524, Humboldt University Berlin, Department of Agricultural Economics.
    14. Katerina Straznicka, 2012. "Temporal stability of risk preference measures," Working Papers 1236, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    15. Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May.

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