College-educated workers are less likely to experience unemployment, but their lifetime earnings are also much more uncertain. This column estimates the risk-adjusted value of college education to be between $225,000 and almost $600,000, corresponding to risk-adjusted increases in total present-value lifetime wealth of 35% to 48%. Increased earnings volatility actually decreased the risk-adjusted value of college between 1968–1980 and 1991–2011 by almost $50,000, even though expected lifetime income increased by about $150,000. Nevertheless, even the most conservative estimates of the value of college education are still positive.
Jeffrey Brown, Chichun Fang, Francisco Gomes, 23 March 2015
Christine Exley, 27 December 2014
Decisions involving charitable giving often occur under the shadow of risk. A common finding is that potential donors give less when there is greater risk that their donation will have less impact. While this behaviour could be fully rationalised by standard economic models, this column shows that an additional mechanism is relevant – the use of risk as an excuse not to give. In light of this finding, this column also discusses how charities may benefit from structuring their donation requests in particular ways.
Jean-Pierre Landau, 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin, 05 November 2014
In the aftermath of the Global Crisis, policymakers and academics alike discussed how uncertainty surrounding macroeconomic policymaking has impacted domestic investment. At the same time, concerns regarding the spillover impact of monetary policy in advanced economies on emerging market economies featured strongly in the international policy debate. This column draws the two debates together, and examines how policy uncertainty in advanced economies has spilled over to emerging markets via portfolio capital flows. It finds remarkable differences in the spillover effects of EU vs. US policy uncertainty.
Graham Loomes, Ganna Pogrebna, 02 August 2014
Researchers use various measures of individual risk attitudes to help explain a wide variety of economic behaviours, including investment decisions and firms’ entry and exit decisions. This column presents recent evidence showing that such measures are very context-specific and need to be used with caution, since the very same people can sometimes appear to be risk taking and sometimes appear to be risk averse, depending on the specific measure used. These discrepancies may arise because people have imprecise preferences under risk, and their responses are liable to be influenced by the particular methods used to elicit them.
Peter Koudijs, Joachim Voth, 12 April 2014
Human behaviour in times of financial crises is difficult to understand, but critical to policymaking. This column discusses new evidence showing that personal experience in financial markets can dramatically change risk tolerance. A cleanly identified historical episode demonstrates that even without losses, negative shocks not only modify risk appetite, but can also create ‘leverage cycles’. These, in turn, have the potential to make markets extremely fragile. Remarkably, those who witnessed this episode but were not directly threatened by it, did not change their own behaviour. Thus, personal experience can be a powerful determinant of investors’ actions and can eventually affect aggregate instability.
Maurizio Habib, Livio Stracca, 28 February 2014
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
Alison Booth, Patrick Nolen, Lina Cardona Sosa, 20 February 2012
Some blame women’s under-representation in high-level jobs on differences between the sexes in risk aversion and competition. But are these differences in behaviour hardwired or learned? This column describes a study that tackles this thorny question with a controlled experiment in single-sex and mixed classrooms in a British university. Women are found to become far less nervous about uncertainty over time with the men out of the room.
Alison Booth, Lina Cardona Sosa, 06 February 2012
Some blame women’s under-representation in high-level jobs on differences between the sexes in risk aversion and competitiveness. But are these differences in behaviour hardwired or learned? The authors of CEPR DP8690 tackled this thorny question with a controlled experiment in single-sex and co-educational classrooms. Women, they find, become far less timorous about uncertainty with the men out of the room.
Graziella Bertocchi, Costanza Torricelli, Marianna Brunetti, 13 March 2010
Does marriage make people less averse to risk? This column argues that this is the case for women, but not for men. But married women's different attitude towards risk has fallen over time as the prevalence of marriage in society has faded. For women who work, marriage makes no difference.
Alison Booth, 14 September 2009
Women are underrepresented in high-paying jobs and upper management. Is that due to gender differences in risk aversion and facing competition? This column describes an experiment in which girls were found to be as competitive and risk-taking as boys when surrounded by only girls. This suggests cultural pressure to act as a girl could explain gender differences that are not innate.
Anton Brender, Emile Gagna, Florence Pisani, 21 July 2009
The crisis has broken the close correlation between differences in expected interest rates and the euro-dollar exchange rate. This column attributes that to the sharp increase in risk aversion triggered by the collapse of Lehman Brothers. It argues that fluctuations in risk aversion explain the path followed by the euro-dollar exchange rate since the beginning of the financial crisis.
Anne Sibert, 18 May 2009
Greedy bankers are getting most of the blame for the current financial crisis. This column explains bankers did behave badly for mainly three reasons. They committed cognitive errors involving biases towards their own prior beliefs; too many male bankers high on testosterone took too much risk, and a flawed compensation structure rewarded perceived short-term competency rather than long-run results.