Risk Aversion and Information Aggregation in Asset Markets

Antonio Filippin and Marco Mantovani

No 404, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: The paper investigates the relation between the risk preferences of traders and the information-aggregation properties of an experimental call market. We find evidence inconsistent with the prediction that market-clearing prices are closer to full revelation of the state when traders are more risk-averse. The observed pattern of prices is close to the risk-neutral benchmark, while individuals are risk averse both in a risk elicitation task and when estimating their risk aversion from their market activity. This purported conflict is explained by an attitude to exploit only part of the information possessed that we label operational conservatism. We show that operational conservatism represents an additional, although suboptimal, way to express one’s risk aversion. A remarkably consistent picture of measured risk preferences emerges then in our data. Independently-elicited risk attitudes retain the footprint of both the standard and the suboptimal facet of risk aversion estimated from subjects’ market activity.

JEL-codes: C81 C91 D81 (search for similar items in EconPapers)
Pages: 66
Date: 2019-04, Revised 2019-04
New Economics Papers: this item is included in nep-exp and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:404

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