Fehr-Duda, Helga, Dr.

After receiving my PhD from the Vienna University of Technology in 1986 I decided to leave academia for good and started to work for the private sector. I held positions in the finance department of Austria’s largest industrial conglomerate and, before the family moved to Zurich, in the country’s most prestigious investment bank. As Head of Research I supported the bank’s mergers and acquisitions deals, many of which involved large privatizations in Eastern Europe. After teaching Financial Economics at the University of Zurich for several semesters I was bold enough to return to academic research in 2003.

My work focuses on individual decision making under risk and over time. It is my team’s ambition to use state-of-the-art experimental and statistical methods to promote our knowledge of people’s behavior.

Publications

Fehr-Duda, Helga and Thomas Epper (2012): Probability and Risk: Foundations and Economic Implications of Probability-Dependent Risk Preferences, Annual Review of Economics (4), 567–593. doi:10.1146/annurev-economics-080511-110950.

ABSTRACT: A large body of evidence has documented that risk preferences depend nonlinearly on outcome probabilities. We discuss the foundations and economic consequences of probability-dependent risk preferences and offer a practitioner’s guide to understanding and modeling probability dependence. We argue that probability dependence provides a unifying framework for explaining many real-world phenomena, such as the equity premium puzzle, the long-shot bias in betting markets, and households’ underdiversification and their willingness to buy small-scale insurance at exorbitant prices. Recent findings indicate that probability dependence is not just a feature of laboratory data, but is indeed manifest in financial, insurance, and betting markets. The neglect of probability dependence may prevent researchers from understanding and predicting important phenomena.

Epper, Thomas, Helga Fehr-Duda, and Adrian Bruhin (2011): Viewing the Future through a Warped Lens: Why Uncertainty Generates Hyperbolic Discounting, Journal of Risk and Uncertainty 43(3), 169-203. doi:10.1007/s11166-011-9129-x.

ABSTRACT: A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggre- gate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people’s proneness to probability distortions.

Fehr-Duda, Helga, Thomas Epper, Adrian Bruhin, and Renate Schubert (2011): Risk and rationality: The effects of mood and decision rules on probability weighting, Journal of Economic Behavior and Organization 78(1-2), 14-24. doi:10.1016/j.jebo.2010.12.004.

ABSTRACT: Empirical research has shown that people tend to overweight small probabilities and underweight large probabilities when valuing risky prospects, but little is known about factors in uencing the shape of the probability weighting curve. Based on a laboratory experiment with monetary incentives, we demonstrate that pre-existing good mood is signicantly associated with women's probability weights: Women in a better than normal mood tend to weight probabilities relatively more optimistically. Many men, however, seem to be immunized against eects of incidental mood by applying a mechanical decision criterion such as maximization of expected value.

Fehr-Duda, Helga, Adrian Bruhin, Thomas Epper, and Renate Schubert (2010): Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size, Journal of Risk and Uncertainty, 40(2), 147-180. doi:10.1007/s11166-010-9090-0.

ABSTRACT: How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that the observed increase in relative risk aversion over gains cannot be captured by the curvature of the value function. Rather, it is predominantly driven by a change in probability weighting of a majority group of individuals who weight probabilities of high gains more conservatively. Contrary to gains, no coherent change in relative risk aversion is observed for losses. These results not only challenge expected utility theory, but also prospect theory.

Bruhin, Adrian, Helga Fehr-Duda, and Thomas Epper (2010): Risk and Rationality: Uncovering Heterogeneity in Probability Distortion, Econometrica, 78(4), 1375-1412. doi:10.3982/ECTA7139. Supplementary Material.

ABSTRACT: It has long been recognized that there is considerable heterogeneity in individual risk taking behavior, but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two major types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from linear probability weighting of varying strength, consistent with prospect theory. Twenty percent of the subjects weight probabilities near linearly and behave essentially as expected value maximizers. Moreover, individuals are cleanly assigned to one type with probabilities close to unity. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.

Fehr-Duda, Helga, Manuele de Gennaro, and Renate Schubert (2006): Gender, Financial Risk, and Probability Weights, Theory and Decision, 60(2-3), 283-313. doi:10.1007/s11238-005-4590-0.

ABSTRACT: Women are commonly stereotyped as more risk averse than men in financial decision making. In this paper we examine whether this stereotype reflects gender differences in actual risk-taking behavior by means of a laboratory experiment with monetary incentives. Gender differences in risk taking may be due to differences in valuations of outcomes or in probability weights. The results of our experiment indicate that value functions do not differ significantly between men and women. Men and women differ in their probability weighting schemes, however. In general, women tend to be less sensitive to probability changes. They also tend to underestimate large probabilities of gains more strongly than do men. This effect is particularly pronounced when the decisions are framed in investment terms. As a result, women appear to be more risk averse than men in specific circumstances.

Working Papers

Epper, Thomas, and Helga Fehr-Duda (2013): Balancing on a Budget Line: Comment on Andreoni and Sprenger (2012)'s 'Risk Preferences Are Not Time Preferences', April 2013. » PDF.

ABSTRACT: In a recent paper, Andreoni and Sprenger (2012) (AS) present evidence on intertemporal risk taking behavior that seems to be at odds not only with classical discounted expected utility theory but also with ank-dependent models involving probability weighting, such as rank-dependent utility and cumulative prospect theory. AS argue in favor of utility differing over the domains of certainty and uncertainty (“u-v” model). Here we show that, contrary to their claim, rank-dependent models provide a unified account for their data on subjects’ budget allocations to portfolios of sooner and later payments. Moreover, the u-v model cannot explain recent evidence that intertemporal risk taking varies significantly with the presence of hedging opportunities, while rank-dependent models can explain these findings. Thus, it appears that rank-dependent models provide not only an explanation for the evidence in AS but also for evidence that contradicts the u-v model.

Epper, Thomas, and Helga Fehr-Duda (2012): The Missing Link: Unifying Risk Taking and Time Discounting, October 2012. » PDF.

ABSTRACT: Almost all important decisions in people’s lives entail risky and delayed consequences. Regardless of whether we make choices involving health, wealth, love or education, almost every choice involves costs and benefits that are uncertain and materialize over time. Because risk and delay often arise simultaneously, theories of decision making should be capable of explaining how behavior under risk and over time interacts. There is, in fact, a growing body of evidence indicating important interactions between behaviorally revealed risk tolerance and patience. Risk taking behavior is delay dependent, and time discounting is risk dependent. Here we show that the inherent uncertainty of future events conjointly with people’s proneness to weight probabilities nonlinearly generates a unifying framework for explaining time-dependent risk taking, risk-dependent time discounting, preferences for late resolution of uncertainty, and several other puzzling interaction effects between risk and time.

Epper, Thomas, Helga Fehr-Duda, and Renate Schubert (2011): Energy-Using Durables: The Role of Time
Discounting in Investment Decisions, IED Working Paper 16, April 2011. » PDF (612 kB).

Epper, Thomas, Helga Fehr-Duda, and Adrian Bruhin (2009): Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting, Working Paper No. 412, Institute for Empirical Research in Economics, University of Zurich, May 2009. » PDF (446 kB).

Bruhin, Adrian, Helga Fehr-Duda, and Thomas F. Epper (2007): Risk and Rationality: Uncovering Heterogeneity in Probability Distortion, SOI Working Paper 0705, May 2007. » PDF (392 kB).

Fehr-Duda, Helga, Thomas Epper, Adrian Bruhin, and Renate Schubert (2007): Risk and Rationality: The Effect of Incidental Mood on Probability Weighting, SOI Working Paper 0703, Feb 2007. » PDF (360 kB).

Selected publications from my former life

• Effizienzorientierte Managementverträge in der verstaatlichten Industrie - Eine Alternative zur Privatisierung? Wirtschaftspolitische Blätter 2/1991.
• Urbane Dienstleistungen. Chancen für die städtische Wirtschaftsförderung. Regensburg 1989.
• Macht und Ökonomie, in: G. Ortmann, W. Küpper (Hrsg.), Mikropolitik, Rationalität, Macht und Spiele in Organisationen. Opladen 1988 (with E. Fehr).
• Power, Efficiency and Profitability - A Radical Theory of the Firm. Economic Analysis and Workers’ Management 1/1987 (with E. Fehr).
• Macht oder Effizienz? Eine ökonomische Theorie der Arbeitsbeziehungen im modernen Unternehmen. Frankfurt 1987.
• Betriebsspezifisches Humankapital, interne Arbeitsmärkte und Gewerkschaften. Quartalshefte der Girozentrale 1/1986.
• Gewerkschaften und Randgruppen in Österreich. Österreichische Zeitschrift für Soziologie 1+2/1986 (with F. Tödtling).
• Austrian Trade Unions in the Period of Economic Crisis, in: R. Edwards, P. Garonna, F. Tödtling (Hrsg.), Unions in Crisis and Beyond. Perspectives from Six Countries. Mass. 1986 (with F. Tödtling).
• Input Demand and Substitution under Target Return Pricing. The Case of Austrian Manufacturing. Empirica 2/1982 (with E. Deutsch).
• Akademikerarbeitslosigkeit und Dequalifizierungstendenzen, in: H.-J. Bodenhöfer (Hrsg.), Hochschulexpansion und Beschäftigung. Vienna 1981 (with Ch. Dorninger).