Anxiety in the face of risk

Thomas Eisenbach and Martin Schmalz

Journal of Financial Economics, 2016, vol. 121, issue 2, 414-426

Abstract: We model an anxious agent as one who is more risk averse with respect to imminent risks than with respect to distant risks. Based on a utility function that captures individual subjects’ behavior in experiments, we provide a tractable theory relaxing the restriction of constant risk aversion across horizons and show that it generates rich implications. We first apply the model to insurance markets and explain the high premia for short-horizon insurance. Then, we show that costly delegated portfolio management, investment advice, and withdrawal fees emerge as endogenous features and strategies to cope with dynamic inconsistency in intratemporal risk-return trade-offs.

Keywords: Risk premia; Insurance; Term structure; Dynamic inconsistency (search for similar items in EconPapers)
JEL-codes: D01 D03 D81 G02 G11 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Anxiety in the face of risk (2013)
Working Paper: Anxiety in the Face of Risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:121:y:2016:i:2:p:414-426

DOI: 10.1016/j.jfineco.2015.10.002

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