Mount professor examines small stakes risk aversion

November 21, 2013

Newburgh, NY -

Fairweather iROC Presentation

If you think twice before buying that lottery ticket, you’re in good company, says B. Erin Fairweather, assistant professor of economics at Mount Saint Mary College.

Fairweather’s recent Investigating Research on Campus (iROC) talk discussed “Small Stakes Risk Aversion: Evidence from the Lab.”

According to Fairweather, economists have found evidence that subjects are risk averse – they try to avoid risk at the expense of higher returns – even when the stakes of the bet are very low.

These findings, explained Fairweather, are inconsistent with current theories about how individuals make decisions when the outcomes are uncertain.

Often, she says, people stick with small guaranteed payouts or low gain-high win percentage bets, even when choosing a riskier bet is statistically in their best interest.

“The subjects might actually be displaying an endowment effect, rather than classic risk aversion,” explained Fairweather.

Endowment effect, she said, is when people ascribe more value to things simply because they own them – even if they have only had the item for a short period. Therefore, if given a small stakes lottery ticket, a research subject might be unwilling to trade it for a higher stakes one.

Fairweather challenged her audience to view the situation in a different way: risk aversion might have a strong link with disappointment aversion. In other words, the thrill of winning is dwarfed by the disappointment of losing.

“It doesn’t matter if you have small stakes or large stakes, you’re always going to be risk adverse when it comes to disappointment aversion,” Fairweather explained. “Maybe it’s just confirmation that disappointment aversion is the way we should be looking at this.”

During seven years as a litigation consultant, Fairweather provided expertise in securities fraud, financial markets, and intellectual property. Her other research areas include control fraud, income inequality, and gender and race.

Fall 2013 marks Fairweather’s first semester as a full time faculty member at the Mount.

“I am very excited to join the Mount community,” she said. “My colleagues have been supporting and welcoming, and my students have been working hard.”

The goal of the Mount’s iROC seminar series is to “provide a forum for Mount faculty, staff, and students to present research proposals, preliminary data, and completed projects,” explained Douglas A. Robinson, assistant professor of biology and coordinator of the program.

The iROC presentations feature various academic fields.

Previous iROCs this semester have included “The Amazon – Past, Present, and Future,” by Michael Boms, of the Mount’s natural sciences division; “Women Environmental Artists: Unearthing Connections and Context,” by speaker Maria Minickiello, the Mount’s executive director of curriculum and instruction for online and adult degree completion; “The Impact of Economic Cycles on the Career Aspirations and Values of College Students,” by Moira Tolan, professor of business, and A. Reza Hossain, associate professor of economics; and “The Effect of the Holocaust on Jewish-Catholic Relations,” by Sr. Peggy Murphy, OP, professor of religious studies.