Intertemporal Aspects of Risk Management and their Behavioral Implications

• Applicant: Professor Dr. Johannes Jaspersen
• Subject Area: Accounting and Finance
• Term: since 2020
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 453187408

Risk management is generally understood as a tool for hedging risk. However, most risk management decisions also include a temporal component, which is rarely considered in research. In the intended research project the temporal component of risk management in general and of insurance decisions in particular will be investigated. To this end, it will first be analyzed whether decision makers recognize the time component of risk management and integrate it into their decisions. In a second step, two well-documented behavioral patterns in intertemporal choice will be applied to risk management decisions and their effects will be investigated. Specifically, it will be investigated whether people's preference for the early resolution of uncertainty about losses increases their willingness to pay for risk management. Furthermore, it is considered whether the commitment to future payments resulting from insurance contracts influences insurance demand. Such commitments could increase insurance demand if people are aware that they weigh current consumption disproportionately more strongly than future consumption. If this is the case, people know that their savings will not be sufficient to build up their own collateral and therefore have a willingness to pay for extrinsically enforced future payments. All three subprojects included in the intended research project start with the development of a theoretical model. The hypotheses derived from this model will then be tested by means of incentive-compatible experiments. The aim of the project is to gain a better understanding of the temporal component of risk management. Based on this understanding, general insights into intertemporal decision behavior under risk can be derived. In addition, the findings of the project will result in recommendations for both the public and the private sector. One example are guidelines regarding the optimal design of insurance contracts from a behavioral perspective.

• DFG Programme: Research Grants
• International Connection: USA
• Cooperation Partners: Professor Keith Marzilli Ericson, Ph.D.; Professor Dr. Richard Peter; Professor Marc Ragin, Ph.D.