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Projet IMPULSION 2018 : sciences de gestion

Publié le 5 février 2018 Mis à jour le 5 février 2018

Risk managementPrésentation du projet : "Individual behavior and risk management : an experimental test from socially responsible investment"

The beginning of the 21st century has been struck by extreme events such as natural catastrophes or economic and financial crises. Part of the explanation lies in human behavior, sometimes lacking individual or collective responsibility. The frequency and the severity of these extreme events  highlight the inability to appreciate the degree of risk and the inefficiency of standard regulations in order to promote responsible behavior. Pinpointing which measure of risk has the greatest weight in the decision process by accounting for human factors and elaborating efficient regulations based on this measure are of the greatest importance for the society as a whole in the years to come.

The main limitation of traditional risk measures comes from the fact that risk models do not account for behavioral features. First, it becomes difficult to consider that individuals make up their mind only on the basis of calculus, without taking into account sentiment, judgments, interpretations or even emotions. Second, it has been proved that human brain does not tackle risky situations in a constant manner, either temporally or across individuals. According to Damasio (2003), decision-making under risk is not irrational but relies on both cognitive and emotional processes. Affect plays a role in the final decision, which cannot be ignored.

Several researchers have already put into question the traditional approach of expected utility and developed alternate theories of choices under risky or uncertain situations. They have already taken into account emotions in decision-making by developing the theory of regret (Savage, 1954; Loomes and Sungden, 1982; Bleichrodt and Wakker, 2015) or prospect theory (Kahneman and Tversky, 1979, 1992; Barberis, 2013). For example, Coricelli et al. (2005) have proved experimentally that some subjects can be totally regret-averse when they want to minimize their regret. Also, Tversky and Kahneman have put forward the existence of a framing effect in their numerous experiments. Decision-makers are more sensitive to a subjective loss (from a personal reference point) than they are to an equally sized gain. Loss aversion can be more determinant in individual behavior than risk aversion. Therefore, the notion of risk is subjective and corresponds to a perception of human brain. This notion depends on which factors the individual is the most sensitive to. Up to now, we do not really know if individuals are more sensitive to risk, regret or losses.

At least, these choice mechanisms may co-exist in the mind but may be at the origin of conflicts. Financial decisions with an ethical connotation, like Socially Responsible Investment (SRI), is an appropriate field of experimentation, creating a sentiment of dilemma. You can morally choose to invest in an ethical fund, but feel regret later if your return is lower than if you had invested in a hedge fund. In a first step, we aim at testing experimentally whether the investors are more sensitive to risk, regret or losses, and how risk aversion, regret aversion or loss aversion depend on individual features, by using the field of SRI (Riedl and Smeets, 2017; Rubaltelli et al., 2015). In a second step, we will design and test the efficiency of Nudges in coherence with the results of the first experiment. The objective of Nudges is not to restrict people’s choices, but to push them towards socially-desired decisions, like for US retirement savings (Thaler and Sunstein, 2008). The innovative aspect of the project is twofold: identifying the most relevant dimensions of risk for human brain activity and suggesting new ways of regulation to nudge the investors towards a socially responsible behavior. At an institutional level, this project pursues several goals: federating a research team in  MAGELLAN, reinforcing the existing links with Canada through the university of Montreal (HEC Montreal, Tech3Lab), and making contributions to research axes of University of Lyon (Labex CORTEX and Organization Social Responsibility, a transversal axis of MAGELLAN).

The project should also contribute to foster increasing knowledge in psychology and neuroscience. In terms of cognitive psychology, we may have a better understanding of risk perception. This research will reinforce our knowledge of human behavior and emotions by studying the sources of the  evolution of attitudes towards risk in terms of chemical stressors or neural responses.

Ce projet IMPULSION financé dans le cadre de l'IDEXLYON pour une durée de 4 ans est coordonné par M. Jean-François GAJEWSKI, Professeur en Sciences de gestion (Centre de recherche Magellan) à Université Jean Moulin Lyon 3.