Periodic Reporting for period 3 - SkewPref (Skewness Preferences – Human attitudes toward rare, high-impact risks )
Okres sprawozdawczy: 2022-04-01 do 2023-09-30
Further work was concerned with the repeated risk-taking of skewed risks. An extensive body of theoretical and experimental literature has shown that, in one-time decision situations, humans are skewness-seeking and dislike risks that feature unlikely but large losses (i.e. negatively skewed risks). We showed that, contrary to intuition, the often-observed phenomenon of penny-picking—repeatedly taking negatively skewed risks—is not at odds with skewness-seeking, but, to the contrary, may even be caused by it. The skewness of the distribution that results from repeatedly taking a skewed risk depends in non-trivial ways on the risk-taking strategy and may even differ in sign from that of the individual risk. With sufficient time available, every risk—no matter how negatively skewed—can be gambled in such a way that, in total, skewness is positive. Because recent work has shown that skewness is decisive for whether risk is taken, this result may be important for economics and finance on a fundamental level.
Another work stream focused on whether, and how, skewness preferences reflect in the prices of financial assets (e.g. stocks and options). Specifically, we studied the asset pricing implications of skewness preferences as implied by probability weighting (the idea that investors overweight rare, high impact events). We obtained and empirically validated several novel implications for asset prices, in particular on what experts call the option-implied premiums on variance and skewness.
Several other projects are currently in progress in will be described in the final scientific report.
During the second half of the project period, additional focus is put on the repeated risk-taking of skewed risks and applications. Moreover, the mentioned theoretical studies will be complemented by experimental ones.