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Saturday, 3 July 2010

Do Hungry People Take Bigger Financial Risks?

The New York Times
On Tuesday June 29, 2010,

Do Hungry People Take Bigger Financial Risks?



Forget the Volcker Rule, a Tobin tax, bonus caps and other Washington proposals intended to make our financial system more stable. Maybe what Wall Street's risk-loving bankers really need is a better diet.

That is one possible implication of a fascinating new study, which finds that people who are hungry are more risk-seeking, and people who are sated are more risk-averse.

Researchers put study subjects on different diets to affect their metabolic states, and then week after week gave them with options to participate in different kinds of lotteries. Some of the lotteries were riskier than others, in terms of their expected and potential payouts. Generally speaking, when subjects were in hungrier states, they chose the riskier lottery options, and when they were full they choose safer lotteries.

The authors suggest that this means metabolic states, and the hormones associated with them, can affect our appetite for all sorts of risks. From the study:Changes in metabolic state systematically altered economic decision making...

A direct comparison can be made with Prospect Theory, where changes in wealth below a reference point induce risk-seeking behaviour, while earnings above a reference point promote risk-aversion. Similar reference-dependent change in risk attitude for food rewards has also been seen in animals.The study is based on a small sample -- about 20 students -- but seems destined to inspire further research on the evolutionary advantages of financial risk-taking.
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Createwealth8888:

Similarly for investing, when the account size is smaller one should take bigger risks to grow the wealth at faster rate and when the account size is bigger one should take smaller risks and moves more towards perservation of wealth.

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