Behavioral economics has become a dominant set of theories in explaining economic behavior, yet such behavior remains under the limited purview of psychological, cognitive, or neural approaches. This article draws on and extends Viviana Zelizer's social meaning of money framework in conjunction with new work in ‘relational accounting’ to suggest a sociological counterpoint, focusing in particular on the social and symbolic meaning attached to individual 401(k) retirement accounts. Following a market downturn, neoclassical and behavioral economics predict various types of behavioral responses, in particular loss aversion - where investors seek to increase risk-taking rather than locking in a sure loss (a loss is more painful to bear than an equivalent gain). A sociological theory that understands the shared meaning of retirement saving would predict something different, a behavior I call durable conservatism. In this article, I show how this concept better explains observed risk behavior in Americans’ 401(k) accounts following the 2002 and 2008 bear markets in stocks, and how that response differed from the behavior documented in non-retirement brokerage accounts.

We propose a family of range-based risk measures to generalize the role of value at risk (VaR) in the formulation of range value at risk (RVaR) considering other risk measures induced by a tail level. We discuss this type of measure in detail and its theoretical properties and representations. Moreover, we present a score function to evaluate the forecasts of these measures. In order to present the proposed concepts in an applied way, we performed illustrations using Monte Carlo simulations and real financial data.

The mathematics of downside financial risk can be difficult to understand: For example a 50% loss requires a subsequent 100% gain to break-even. A given percentage loss always requires a greater percentage gain to break-even. Instead, many non-expert investors may assume for example that a 50% gain is sufficient to offset a 50% loss. Over 3,498 participants and five experiments, the widespread illusion that a sequence of equal percentage gains and losses produces a zero overall return was demonstrated. Participants continued to err frequently, even with percentage returns of +/-100%, or when financially incentivized. Financial literacy, numeracy, and deliberation were all shown to independently contribute to accurate performance. These results have implications for promoting the understanding of downside financial risk.

Financial products are priced using risk-neutral expectations justified by hedging portfolios that (as accurate as possible) match the product’s payoff. In insurance, premium calculations are based on a real-world best-estimate value plus a risk premium. The insurance risk premium is typically reduced by pooling of (in the best case) independent contracts. As hybrid life insurance contracts depend on both financial and insurance risks, their valuation requires a hybrid valuation principle that combines the two concepts of financial and actuarial valuation. The aim of this paper is to present a novel three-step projection algorithm to valuate hybrid contracts by decomposing their payoff in three parts: a financial, hedgeable part, a diversifiable actuarial part, and a residual part that is neither hedgeable nor diversifiable. The first two parts of the resulting premium are directly linked to their corresponding hedging and diversification strategies, respectively. The method allows for a separate treatment of unsystematic, diversifiable mortality risk and systematic, aggregate mortality risk related to, for example, epidemics or population-wide improvements in life expectancy. We illustrate our method in the case of CAT bonds and a pure endowment insurance contract with profit and compare the three-step method to alternative valuation operators suggested in the literature.

Social discounting conventions vary widely. Some differences reflect institutional constraints, but many reflect differing assumptions about how a social discount rate should be derived and applied. The divide between advocates of social opportunity cost and social time preference (STP) frameworks seems unbridgeable. There is no consensus among STP advocates on whether the social cost of funding $1 of public spending is barely more than $1 of consumption or perhaps more than $2; or on whether the covariance of public service benefits with income merits a discount rate premium that is trivial or a few percentage points. The practicalities of government fund raising are sometimes overlooked. The issues are here reviewed in the light of the literature and of experience with developing and applying social discounting regimes and extended debates within government.

Using optimization techniques in a Simulation framework, this study demonstrates the synergy between risk balancing and alternative strategies in effectively reducing risk under changing farm conditions. Highly risk-averse farmers tend to prefer integrated risk-management plans, based on the diversification principle, that yield offsetting combinations of the risk-reducing benefits of most strategies and the profit-generating capacities of the others. The greater appeal of a more diversified plan usually downplays the risk balancing strategy as the farm utilizes credit reserves to implement other production and marketing plans considered essential to Overall risk reduction. The farm, however, still realizes overall, though more regulated, reduction in its financial risk position.

Incorporation of futures markets into the theory of the firm under uncertainty has received considerable attention in risk management. A theoretical model of optimal firm decisions in cash and futures markets considering price, production, and financial risks is presented. Production and marketing strategies for corn and soybeans in Georgia and Illinois are analyzed to determine the optimal amount of futures contracting which may be a hedge or a speculative position. A partial hedge is optimal for most situations for risk averse producers when the amount hedged is variable. With fixed quantity transactions, speculative and cash positions, but not hedging, tend to be E-V efficient.

Risk analysis continues to emphasize price and yield variability as the principal components of the decisionmaker's risk environment. This research demonstrates the relative importance of financial risk for a representative cotton farm in Arizona. For highly leveraged operations, financial risk may account for 70 percent of the total risk faced by the producer. Implications for future risk analysis are discussed in light of these findings.

This study employs correlation relationships to measure the strength of trade-offs between business and financial risks as a representation of the strategic capital adjustment process. Under different business risk measures based on varying lengths of historical farm income data, results suggest that farmers tend to adopt a myopic perspective when contemplating risk-balancing plans. Cross-sectional regression results for two-time period models covering the decade of the 1980s and 1990s yielded important implications. The liquidity-constrained environment of the 1980s emphasizes the combination of risk-balancing plans, specialization, and market revenue-enhancing strategies. In the 1990s, risk balancing becomes compatible with risk-reducing crop diversification and insurance protection plans.

This paper takes up recent challenges to consequentialist forms of ethically evaluating risks and explores how a non-consequentialist form of deliberation, Kantian ethics, can address questions about risk. I examine two cases concerning ethically questionable financial risks: investing in abstruse financial instruments and investing while relying on a bailout. After challenging consequentialist evaluations of these cases, I use Kant’s distinction between morality and prudence to evaluate when the investments are immoral and when they are merely imprudent. I argue that the investment practices are imprudent when they do not take adequate precautions to secure the firm’s long-term flourishing. They are immoral in a Kantian sense when they risk the destruction of the financial system upon which the firms depend. The upshot of my analysis is that moral actions require more risk aversion than prudent actions and prudent actions require more risk aversion than expected-value-maximizing actions.

Stochastic Efficiency with Respect to a Function (SERF) is used to rank transgenic cotton technology groups and place an upper and lower bound on their value. Yield and production data from replicated plot experiments are used to build cumulative distribution functions of returns for nontransgenic, Roundup Ready, Bollgard, and stacked gene cotton cultivars. Analysis of Arkansas data indicated that the stacked gene and Roundup Ready technologies would be preferred by a large number of risk neutral and risk averse producers as long as the costs of the technology and seed are below the lower bounds calculated in this manuscript.

While extensive literature exists on the valuation and risk management of financial guarantees embedded in insurance contracts, both the corresponding longevity guarantees and interactions between financial and longevity guarantees are often ignored. The present paper provides a framework for a joint analysis of financial and longevity guarantees, and applies this framework to different annuity conversion options in deferred unit-linked annuities. In particular, we analyze and compare different versions of so-called guaranteed annuity options and guaranteed minimum income benefits with respect to the value of the option and the resulting risk for the insurer. Furthermore, we examine whether and to what extent an insurance company is able to reduce the risk by typical risk management strategies. The analysis is based on a combined stochastic model for both financial market and future survival probabilities. We show that different annuity conversion options have significantly different option values, and that different risk management strategies lead to a significantly different risk for the insurance company.

This paper considers certain applications of economics to actuarial work, concentrating on three issues of public interest. The background to the first two issues is the Government's encouragement of personal pensions particularly through stakeholder pensions. The paper shows how the use of an economics model enables investigations to be made, firstly on the demand for personal pensions by different income groups and secondly on the likely inequality of benefits between generations due to variations in the rates of return. The conclusion on the first issue is that personal pensions are of little benefit to low-earners, i.e. those the Government most wants to benefit, and recommends a way of rectifying this; the main conclusion on the second issue is that households will take action to mitigate much of the inequality. The third issue, that of estimating future rates of return, is one of key financial importance. The paper reviews relevant economic papers in this area and considers how the actuarial profession may improve communication with the economics discipline and with its members.

This paper reviews methods for hedging and valuation of insurance claims with an inherent financial risk, with special emphasis on quadratic hedging approaches and indifference pricing principles and their applications in insurance. It thus addresses aspects of the interplay between finance and insurance, an area which has gained considerable attention during the past years, in practice as well as in theory. Products combining insurance risk and financial risk have gained considerable market shares. Special attention is paid to unit-linked life insurance contracts, and it is demonstrated how these contracts can be valued and hedged by using traditional methods as well as more recent methods from incomplete financial markets such as risk-minimisation, mean-variance hedging, super-replication and indifference pricing with mean-variance utility functions.

This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. I compare the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, I consider what makes a good risk management system.

Many recently introduced unit-linked life insurance policies contain provisions allowing policyholders to lapse the product. The problem of pricing this surrender option is difficult as it involves modelling lapse decisions which may be contingent on different factors. This paper develops a methodology which enables us to model lapse behaviour within a framework provided by developments in financial economics. Using marked point processes with stochastic intensities, we present an approach which accounts for changes in the lapse behaviour of policyholders due to different economic factors. As a result, the model produces more accurate financial values for insurance contracts contingent on financial markets. In the context of unit-linked policies, we illustrate the method by allowing the lapse decision to depend on the stochastic volatility of the underlying asset. Our simulation study indicates that there is a strong relation between the single premiums of these policies and the lapse behaviour.

Høgh, Linton and Nielsen (2006) showed that the famous result in the award winning paper of Froot and Stein (1998) is not correct in the sense that their result does not follow from their assumptions. In this paper we show that the economic intuition behind the paper of Froot and Stein (1998) is correct and that their result can be obtained when the market is reformulated in a continuous time setting and modern market theory is employed.

We calculate the present value of state pension liabilities under existing policies and separately under policy changes that would affect pension payouts. If promised payments are viewed as default free, then it is appropriate to use discount rates given by the Treasury yield curve. If plans are frozen at June 2009 levels, then the present value of liabilities would be $4.4 trillion. Under the typical actuarial method of recognizing future service and wage increases, this figure rises to $5.2 trillion. Compared to $1.8 trillion in pension fund assets, the baseline level of unfunded liabilities is therefore around $3 trillion. A 1 percentage point reduction in cost-of-living adjustments (COLAs) would lower total liabilities by 9–11%; implementing actuarially fair early retirement would reduce them by 2–5%; and increasing the retirement age by 1 year would reduce them by 2–4%. Dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities around $1.5 trillion more than plan assets. This suggests that taxpayers will bear the lion's share of the costs associated with the legacy liabilities of state DB pension plans.