Market booms are often followed by dramatic falls. To explain this requires an asymmetry in the underlying shocks. A straightforward model of technological progress generates asymmetries that are also the source of growth cycles. Assuming a representative consumer, we show that the stock market generally rises, punctuated by occasional dramatic falls. With high risk aversion, bad news causes dr...

We consider the effects of risk preferences in mixed-strategy equilibria of 2 × 2 games, provided such equilibria exist. We identify sufficient conditions under which the expected payoff in the mixed equilibrium increases or decreases with the degree of risk aversion. We find that (at least moderate degrees of) risk aversion will frequently be beneficial in mixed equilibria. © 2007 Elsevier Inc...

To a considerable extent, risk aversion as it is commonly observed is caused by loss aversion. Several indexes of loss aversion have been proposed in the literature. The one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components: basic utility, probability weighting, and loss aversion. The index is independent of the unit of payment. The main theor...

Building upon the works of Gilboa (1989), Shalev (1997) and De Waegenaere and Wakker (2001), we show that a simple version of variation aversion, jointly with a myopia axiom allows to derive in an infinite setting a meaningful expression for evaluating income streams. Furthermore, we prove that the usual additive discounted expectation introduced by Koopmans (1972) can be accommodated in a non-...

In a sequential bargaining game framework with complete information and no discounting, this paper proposes a mechanism in the spirit of a final offers arbitration (FOA). At each step, two parties may stop negotiating in order to implement a lottery between the two current proposals or go on making new proposals. A crucial difference with the FOA is that the list of past proposals is recorded a...

Article history: Received 7 May 2013 Available online 9 February 2015 JEL classification: D44 D82 G00

We investigate the outcome of bargaining when a player’s pay-off from agreement is risky. We find that a risk-averse player typically increases his equilibrium receipts when his pay-off is made risky. This is because the presence of risk makes individuals behave “more patiently” in bargaining. Strong analogies are drawn to the precautionary saving literature. We show that the effect of risk on ...

This paper argues for an alternative to the standard model used for interpreting empirical value of statistical lives (VSL). The introduction of risk aversion with respect to the length of life significantly changes the effect of age on VSL. Our estimates suggest that current practice to give an economic value to longevity gains puts too small weight on the young. The correction we suggest over...

Traditionally, downside risk aversion is the study of the placement of a pure risk (a secondary risk) on either the upside or the downside of a primary two-state risk. When the decision maker prefers to have the secondary risk placed on the upside rather than the downside of the primary lottery, he is said to display downside risk aversion. The literature on the intensity of downside risk avers...