Up Close It Feels Dangerous: "Anxiety" in the Face of Risk
April 2013 Number 610
Revised May 2014
JEL classification: D01, D03, D81, G02, G11, G12
Thomas M. Eisenbach and
Martin C. Schmalz
We model an “anxious” agent as one who is more risk averse with respect to imminent risks than distant risks. Such horizon-dependent risk aversion preferences describe well-documented features of (i) individual behavior, (ii) equilibrium asset prices, and (iii) endogenously arising institutions. In particular, based on a utility function that captures individual subjects’ behavior in the lab, we predict a downward-sloping term structure of risk premia, and show that costly delegated portfolio management is a strategy to cope with dynamic inconsistency with respect to intra-temporal risk-return trade-offs.