Related papers: Risk aversion in financial decisions: A nonextensi…
Different models to study the wealth distribution in an artificial society have considered a transactional dynamics as the driving force. Those models include a risk aversion factor, but also a finite probability of favoring the poorer…
Systemic risk in banking systems remains a crucial issue that it has not been completely understood. In our toy model, banks are exposed to two sources of risks, namely, market risk from their investments in assets external to the banking…
This paper investigates the dynamics of gambling and how they can affect risk-taking behavior in regions not explored by Kahneman and Tversky's Prospect Theory. Specifically, it questions why extreme outcomes do not fit the theory and…
Risk aversion is a common behavior universal to humans and animals alike. Economists have traditionally defined risk preferences by the curvature of the utility function. Psychologists and behavioral economists also make use of concepts…
Portfolio diversification is a cornerstone of modern finance, while risk aversion is central to decision theory; both concepts are long-standing and foundational. We investigate their connections by studying how different forms of…
We continue the analysis of quantum-like description of market phenomena and economics. We show that it is possible to define a risk inclination operator acting in some Hilbert space that has a lot of common with quantum description of the…
Prospect theory is widely viewed as the best available descriptive model of how people evaluate risk in experimental settings. According to prospect theory, people are risk-averse with respect to gains and risk-seeking with respect to…
We introduce a way to compare actions in decision problems. One action is safer than another if the set of beliefs at which the decision-maker prefers the safer action expands as the decision-maker becomes more risk averse. We provide a…
We propose a general interpretation for long-range correlation effects in the activity and volatility of financial markets. This interpretation is based on the fact that the choice between `active' and `inactive' strategies is subordinated…
An empirical analysis, suggested by optimal Merton dynamics, reveals some unexpected features of asset volumes. These features are connected to traders' belief and risk aversion. This paper proposes a trading strategy model in the optimal…
To quantify an operational risk capital charge under Basel II, many banks adopt a Loss Distribution Approach. Under this approach, quantification of the frequency and severity distributions of operational risk involves the bank's internal…
The problem of non-stationarity in financial markets is discussed and related to the dynamic nature of price volatility. A new measure is proposed for estimation of the current asset volatility. A simple and illustrative explanation is…
An investor with constant absolute risk aversion trades a risky asset with general It\^o-dynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the…
Cooperative dynamics are central to our understanding of many phenomena in living and complex systems. However, we lack a universal mechanism to explain the emergence of cooperation. We present a novel framework for modelling social dilemma…
Agents' learning from feedback shapes economic outcomes, and many economic decision-makers today employ learning algorithms to make consequential choices. This note shows that a widely used learning algorithm, $\varepsilon$-Greedy, exhibits…
Risk control has become one of the major concern of financial institutions. The need for adequate statistical tools to measure and anticipate the amplitude of the potential moves of financial markets is clearly expressed, in particular for…
Take up of microcredit by the poor for investment in businesses or human capital turned out to be very low. We show that this could be explained by risk aversion, without relying on fixed costs or other forms of non-convexity in the…
Uncertainty is prevalent in engineering design, data-driven problems, and decision making broadly. Due to inherent risk-averseness and ambiguity about assumptions, it is common to address uncertainty by formulating and solving conservative…
We study dynamics of a simulated world with stock and money, driven by the externally given processes which we refer to as sentiments. The considered sentiments influence the buy/sell stock trading attitude, the perceived price uncertainty,…
We use machine learning techniques to investigate whether it is possible to replicate the behavior of bank managers who assess the risk of commercial loans made by a large commercial US bank. Even though a typical bank already relies on an…