Risk attitudes implied by valuations of risk-increasing assets depart markedly from those implied by valuations of risk-reducing assets. For instance, many are unwilling to pay the expected value for a risky asset or for its perfect hedge. Although nearly every theory of risk preference (and logic) demands a negative correlation between valuations of bets and hedges, we observe positive correlations. This inconsistency is difficult to expunge.

Two studies replicate the anomaly identified by Frederick, Meyer and Levis (2015) and Frederick, Levis, Malliaris and Meyer (2018). People show typical risk averse behavior by valuing risk below the focal lottery’s expected value, but they do not bid above its expected value for the hedge that eliminates the risk. Following the authors, we conduct finer analyses by separating participants into two groups – “experts” who understand that acquiring the hedge makes winning certain versus “novices” who do not understand the winning implications of acquiring the hedge. We find that (1) “experts” are more inclined to purchase the hedge compared to the “novices” and (2) unlike the “novices,” they value the hedge significantly more than the risk instrument, but only if they are given the risk instrument free of charge. However, even there, the hedge valuations are significantly less than the lottery’s expected value suggesting that the anomaly described in Frederick et al. (2015, 2018) is robust and likely to affect the way our discipline conceptualizes and models risk behavior.