Chapter 4 Flashcards
- Explain cushion hypothesis proposed by Weber & Hsee (1998). How did cushion hypothesis explain the difference between American and East Asian’s risk attitudes in financial and social domain?
The cushion hypothesis, proposed by Weber and Hsee in 1998, suggests that cultural differences in risk attitudes (perceived risk) between Americans and East Asians can be explained by differences in social and financial cushions available in their respective societies.
East Asians are more risk tolerant in financial than Americans and reverse in social domain.
Cushion hypothesis says that financial risk of east Asians is mitigated by friends and family.
In an experiment of receiving 1500 or 0 next year with 50-50 possibility, partitcipants were asked how much they would be willing to pay for this. Chinese saw the perceived risk as less hence paid more for participation as compared to Westerners. Because they saw it as less rsky as they have cushion from family.
- Some researchers find Chinese are more sensitive to framing. What are the possible explanations?
i. Holistic vs Analytical Cognitive Style
When provided a game to buy insurance, Chinese who thought in loss frame didn’t buy an insurance but 71% of the Americans even in the loss frame bought insurance which shows that Chinese are affected by the way the insurance is framed and sensitive to framing. They are more distracted by context whereas westerners aren’t.
ii. Lack of experience with financial products
They don’t know much about financial products which results to seeing things differently when presented differentlty.
- Researchers have documented that cross-cultural differences in time preference can predict cross-national heterogeneity in the financial market, or other economic phenomena. Give two examples and explain the potential mechanisms.
To check time preferences based on cross cultural differences
They asked participants of different counties:
a. Payment 3400 this month
b. Payment 3800 next month
Waiting low in Latin Europe, Asia, East Europe, Latin Maerica and Africa as compared to America and Germanic countries.
i. Time preference and Fiscal Policy
Households can decide to consume or save transfers that they received from the government. If the government borrows to spend more now, then the consumers would anticipate higher taxes in the future hence will save now to pay for future. They have low time preference and would have low discount rate for future.
ii. Value premia across countries as a sign of patience
Value premium for stocks is high because of myopic loss aversion so countries which are more patient in the future having lower discount factor for future will be having less value premia.
‣Equity premium (Rieger, Wang, & Hens, 2013)
‣Household debt maturity (Breuer, W., T. Hens, T., A. J.
Salzmann, & M. Wang, 2015)
‣Dividend payout policy (Breuer, Rieger, Soypak, 2014)
‣Green constitutions (Imhof, Gutmann, & Voigt, 2016)
‣Life expectancy (Bulley, A. and G. V. Pepper, 2017)
- Using international data, some researchers have found ambiguity aversion and time discounting are related to equity premium. Explain the plausible mechanisms for these finding.
If individuals have higher ambiguity aversion then they have higher equity risk premium .
Similarly if they have higher time preference for the present then they have higher equity premium which can explain the puzzle. As shown by the graph, hyperbolic discount factor if β is smaller then it alks about larger time discounting( as the discount factor is really low 1/1+d) and strong present bias. So countries with strong present bias had high equity risk premium as compared to others who didn’t.
- Explain what is priming. How can we use priming to test cultural influences? Give an example of the studies we mentioned in the class.
Priming- exposure to one stimulus influences a response to a subsequent stimulus, withoyt conscious guidance or intention.
National Tawiwan Uni vs Peking Uni (China)
After being primed by Confucian values, we were seeing response to different stimula: risk preference, trusthworthiness, and time preference.
Found that Chinese students after receiving Confucian prime were less loss averse and more impatient as they have a high present bias, risk lovinf. PKU Chinese students ranked Confucianism lower and disagreed more after priming
Taiwanese Students after receiving prime were more patient as they have lower present bias and more trustworthy. Agreed with Confucianism more.
