Salience or event-splitting? An experimental investigation of correlation sensitivity in risk-takingJournal articleMoritz Loewenfeld et Jiakun Zheng, Journal of the Economic Science Association, 2024

Salience theory relies on the assumption that not only the marginal distribution of lotteries, but also the correlation of payoffs across states impacts choices. Recent experimental studies on salience theory seem to provide evidence in favor of such correlation effects. However, these studies fail to control for event-splitting effects (ESE). In this paper, we seek to disentangle the role of correlation and event-splitting in two settings: (1) the common consequence Allais paradox as studied by Bordalo et al. (Q J Econ 127:1243–1285, 2012), Frydman and Mormann (The role of salience in choice under risk: An experimental investigation. Working Paper, 2018), and Bruhin et al. (J Risk Uncertain 65:139–184, 2022); (2) choices between Mao pairs as studied by Dertwinkel-Kalt and Köster (J Eur Econ Assoc 18:2057–2107, 2020). In both settings, we find evidence suggesting that recent findings supporting correlation effects are largely driven by ESE. Once controlling for ESE, we find no consistent evidence for correlation effects. Our results thus shed doubt on the validity of salience theory in describing risky behavior.

The discounting premium puzzle: Survey evidence from professional economistsJournal articleChristian Gollier, Frederick van der Ploeg et Jiakun Zheng, Journal of Environmental Economics and Management, Volume 122, pp. 102882, 2023

We surveyed economists’ attitudes toward adjusting discount rates to the risk profile of public programs. Three-quarters of respondents recommend to use project-specific discount rates. For example, on average, respondents discount railway infrastructures more than hospitals and climate mitigation. But the degree of discount discrimination between distinct risk profiles of different projects is fairly limited in our sample given the differences in risk profiles for these projects. Economic experts thus penalize risky public projects far less than financial markets penalize private investments. We call this the ”discount premium puzzle”. Finally, among experts in favor of a single discount rate, there is no consensus on whether it should be based on the average cost of capital in the economy, the sovereign borrowing cost, or the Ramsey rule, which gives rise to disagreement over the level of the recommended discount rate.

S-shaped narrow framing, skewness and the demand for insuranceJournal articleYichun Chi, Jiakun Zheng et Shengchao Zhuang, Insurance: Mathematics and Economics, Volume 105, pp. 279-292, 2022

The existing literature in insurance economics has shown that narrow framing can explain why people buy too little insurance compared to what standard theory predicts. However, there is also ample evidence suggesting people sometimes buy too much insurance. In this paper, we assume S-shaped narrow framing, i.e., the local utility function for evaluating the net insurance payoff is convex in the loss domain but concave in the gain domain, and show that it can reconcile with both insurance puzzles simultaneously. Especially, we show the policyholder under S-shaped narrow framing is more likely to underinsure more negatively skewed risks of loss but to overinsure less negatively skewed risks of loss when only coinsurance is offered. We further characterize the optimal insurance scheme under S-shaped narrow framing while incentive compatibility is satisfied. It contains a straight deductible when the net insurance payoff is negative but partial insurance when the net insurance payoff is positive.

Willingness to pay for reductions in health risks under anticipated regretJournal articleJiakun Zheng, Journal of Health Economics, Volume 78, pp. 102476, 2021

In this paper, we study the willingness to pay for reductions in health risks within a framework of anticipated regret. We show that ex post information provision can be a relevant factor for regret theory to account for why people are sometimes so inclined to protect themself against certain types of health risks but not others. In particular, we find that under full resolution of uncertainty disproportionate aversion to large regrets exaggerates willingness to pay estimates. The effect induced by this notion of regret aversion can be interpreted as if regret-averse people overweight risk reductions due to prevention. However, as feedback over forgone acts is missing, the regret aversion effect disappears. Finally, we show that information avoidance induced by regret aversion can significantly bias our evaluation to prefer those health programs that completely eliminate a risk, i.e., the certainty effect.

Optimal insurance design under narrow framingJournal articleJiakun Zheng, Journal of Economic Behavior & Organization, Volume 180, pp. 596-607, 2020

In this paper, we study insurance decisions when the policyholder evaluates insurance with narrow framing. We show that due to aversion to risk on the net insurance payoff, i.e., insurance indemnity minus insurance premium, narrow framing reduces insurance demand. This helps explaining the observed low insurance demand in many insurance markets. We also show that the optimal insurance contract involves a deductible and the coinsurance of losses above the deductible when transaction costs depend on the actuarial value of the policy. Moreover, when the policyholder is loss averse over the net insurance payoff, a fixed indemnity equal to insurance premium should be paid for a range of intermediate losses.