Changes in risk preferences: Evidence from Swedish harness horse racing data

摘要

According to Stigler and Becker (1977) , a main feature of economic models is that the state of the world should not influence individuals' preferences. Loewenstein (20 0 0) and Loewenstein et al. (2001) emphasize that emotions, such as fear, rapidly alter human behavior and may lead to responses that bypass the cognitive process. In a recent study, Guiso et al. (2018) find that risk aversion substantially increased after the 2008 financial crisis. They approximate that the fraction of individuals who said they did not want to take any financial risks increased from 16% to 43% following this financial crisis. Also, in their experimental study, they find that showing a horror movie to their experimental subjects led to a significant increase in these subjects' risk aversion. Their evidence shows that the observed increase in self-reported risk aversion cannot be explained solely by changes in wealth but that variations in risk-aversion are also due to psychological factors. A growing number of studies have considered the impact of non-economic shocks, such as catastrophic events, on riskWe measure the time variation of risk preferences in real market data. We utilize data on Swedish tote-betting on horse races for the period 1995 to 2015 and show that risk preferences among horse-race bettors change with economic conditions. More specifically, we extract a measure of risk-aversion based on the favorite-longshot bias (FLB) and provide evidence that the computed measure follows the consumer-confidence index. In addition, we show by an application that the FLB-based risk-preference measure sharpens the predictions of a simple forecasting model for Swedish industrial production. Furthermore, we show that risk-aversion consistently increases following shocking news on disastrous events, including non-economic events such as natural disasters and terrorist attacks. We argue that emotions, such as fear, are the likely explanation for this variation. (c) 2021 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )