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Risk Perceptions and Attitudes

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  • Miroslav Misina

Abstract

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.

Suggested Citation

  • Miroslav Misina, 2005. "Risk Perceptions and Attitudes," Staff Working Papers 05-17, Bank of Canada.
    • Handle: RePEc:bca:bocawp:05-17
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    References listed on IDEAS

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    4. Angelo Melino & Alan X. Yang, 2003. "State Dependent Preferences Can Explain the Equity Premium Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 806-830, October.
    5. Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
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    7. Slovic, Paul & Finucane, Melissa & Peters, Ellen & MacGregor, Donald G., 2002. "Rational actors or rational fools: implications of the affect heuristic for behavioral economics," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 31(4), pages 329-342.
    8. Miroslav Misina, 2003. "Are Distorted Beliefs Too Good to be True?," Staff Working Papers 03-4, Bank of Canada.
    9. 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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    Cited by:

    1. Miroslav Misina, 2008. "Changing investors' risk appetite: Reality or fiction?," The European Journal of Finance, Taylor & Francis Journals, vol. 14(6), pages 489-501.
    2. Nikola Tarashev & Kostas Tsatsaronis, 2006. "Risk premia across asset markets: information from option prices," BIS Quarterly Review, Bank for International Settlements, March.

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    More about this item

    Keywords

    Economic models; Financial markets;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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