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Risk Perceptions and Attitudes

  • Miroslav Misina

Changes in risk perception have been used in various contexts to explain shorter-term developments in financial markets, as part of a mechanism that amplifies fluctuations in financial markets, as well as in accounts of "irrational exuberance." This approach holds that changes in risk perception affect actions undertaken in risky situations, and create a discrepancy between the risk attitude implied by those actions and the a priori description of risk attitude as summarized by the Arrow-Pratt coefficients of risk aversion. The author characterizes this discrepancy by introducing the notion of risk perception within the expected utility theory, and proposes the concept of implied risk aversion as a summary measure of risk attitudes implied by agents' actions. Properties of implied risk aversion are related to an individual's future outlook. Key ideas are illustrated using an asset-pricing model.

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Paper provided by Bank of Canada in its series Working Papers with number 05-17.

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Length: 33 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bca:bocawp:05-17
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  1. Danthine, Jean-Pierre & Donaldson, John B. & Giannikos, Christos & Guirguis, Hany, 2004. "On the consequences of state dependent preferences for the pricing of financial assets," Finance Research Letters, Elsevier, vol. 1(3), pages 143-153, September.
  2. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  3. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
  4. Miroslav Misina, 2003. "Are Distorted Beliefs Too Good to be True?," Working Papers 03-4, Bank of Canada.
  5. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  6. Angelo Melino & Alan X. Yang, 2003. "State Dependent Preferences Can Explain the Equity Premium Puzzle," Working Papers melino-03-01, University of Toronto, Department of Economics.
  7. Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
  8. Alan Greenspan, 2003. "Federal Reserve Board's semiannual monetary policy report to the Congress: testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 11, 2003," Speech 19, Board of Governors of the Federal Reserve System (U.S.).
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