Anxiety in the Face of Risk

Thomas Eisenbach and Martin Schmalz

No 1371, Working Papers from Princeton University, Department of Economics, Econometric Research Program.

Abstract: We model an anxious agent as one who is more risk averse for imminent than for distant risk. Such preferences can lead to dynamic inconsistencies with respect to risk trade-offs. We derive implications for financial markets such as a term structure in risk premia, as well as overtrading and price anomalies around announcement dates, which are found empirically. We show that strategies to cope with anxiety can explain costly delegation of investment decisions. Finally, we model how an anxiety-prone agent may endogenously become overconfident and take excessive risks.

JEL-codes: C02 C20 E22 G11 (search for similar items in EconPapers)
Date: 2011-11
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Journal Article: Anxiety in the face of risk (2016)
Working Paper: Anxiety in the face of risk (2013)
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