Characteristics of the South African retirement fund industry

Using administrative data, we examine three characteristics of the South African retirement fund industry–funding stability, risk sharing and efficiency–over the period 1996-2018. We find that there have been significant decreases in assets per member for private funds, pension funds and retirement annuities, which could reflect decreasing funding ratios in the retirement fund system. The retirement […]

Random Expected Utility Theory with a Continuum of Prizes

This note generalizes Gul and Pesendorfer’s random expected utility theory, a stochastic reformulation of von Neumann-Morgenstern expected utility theory for lotteries over a finite set of prizes, to the circumstances with a continuum of prizes. Let [0,M] denote this continuum of prizes; assume that each utility function is continuous, let C0[0,M] be the set of all utility […]

Information Contagion and Systemic Risk

We examine the effect of ex-post information contagion on the ex-ante optimal portfolio choices of banks and the welfare losses due to joint default. Because of counterparty risk and common exposures, bad news about one bank reveals valuable information about another bank, thereby triggering information contagion. Systemic risk is defined as the ex-ante probability of […]

Global commodities and African stocks: insights for hedging and diversification strategies

Owing to frequent fluctuations in global markets, diversifying across emerging markets is increasingly becoming a necessity. Despite this, a cloud of uncertainty surrounds the relative capacities of emerging markets to provide the required shields for international investors, especially during extreme market conditions. In this paper, we explore the relative potentials of African equities to provide […]

Bayesian learning with multiple priors and non-vanishing ambiguity

The existing models of Bayesian learning with multiple priors by Marinacci (2002) and by Epstein and Schneider (2007) formalize the intuitive notion that ambiguity should vanish through statistical learning in an one-urn environment. Moreover, the multiple priors decision maker of these models will eventually learn the ‘’truth’’. To accommodate non vanishing violations of Savage’s (1954) […]

Who’s Afraid of the Big Bad Wolf? Risk Aversion and Gender Discrimination in Assessment

This study exploits a natural experiment to evaluate the gender bias effect associated with negative marking due to gender-differentiated risk aversion. This approach avoids framing effects that characterize experimental evaluation of negative marking assessments. Evidence of a gender bias against female students is found. Quantile regressions indicate that female students in higher quantiles are substantially […]

The impact of statistical learning on violations of the sure-thing principle

This paper experimentally tests whether violations of Savage’s (1954) subjective expected utility theory decrease if the ambiguity of an uncertain decision situation is reduced through statistical learning. Because our data does not show such a decrease, existing models which formalize ambiguity within an Anscombe-Aumann (1963) framework – thereby reducing to expected utility theory in the […]

A decision-theoretic model of asset-price underreaction and overreaction to dividend news

We combine new developments in decision theory with a standard consumption-based asset-pricing framework. In our model the efficient market hypothesis is violated if and only if agents’ beliefs’ express ambiguity about the stochastic process driving economic fundamentals. Asset price fluctuations result because agents with ambiguous beliefs are prone to a con…firmatory bias in the interpretation […]

Do Bayesians learn their way out of ambiguity?

In standard models of Bayesian learning agents reduce their uncertainty about an event’s true probability because their consistent estimator concentrates almost surely around this probability’s true value as the number of observations becomes large. This paper takes the empirically observed violations of Savage’s (1954) sure thing principle seriously and asks whether Bayesian learners with ambiguity […]

Risk Aversion: Experimental Evidence from South African Fishing Communities

We estimate the risk attitudes of a large sample of small-scale fishers from various fishing communities along the west coast of South Africa, using subjects’ choices over lotteries with real monetary prizes. We find that participants are moderately risk averse and that risk attitudes vary with certain socio-demographic variables. In particular, females are found to […]

Indecisiveness aversion and preference for commitment

We present an axiomatic model of preferences over menus that is motivated by three assumptions. First, the decision maker is uncertain ex ante (i.e. at the time of choosing a menu) about her ex post (i.e. at the time of choosing an option within her chosen menu) preferences over options, and she anticipates that this […]

Revisiting independence and stochastic dominance for compound lotteries

We establish mathematical equivalence between independence of irrelevant alternatives and monotonicity with respect to first order stochastic dominance. This formal equivalence result between the two principles is obtained under two key conditions. Firstly, for all , each principle is defined on the domain of compound lotteries with compoundness level . Secondly, the standard concept of […]

Returns to Schooling: Skills Accumulation or Information Revelation?

This paper explores the degree to which imperfect information in the labour market regarding worker quality is likely to impact employment opportunities, as well as the wages associated with those opportunities. The primary purpose of this paper is to provide preliminary empirical evidence that market imperfections exist in South Africa’s labour market, that those imperfections […]

Half empty, half full and why we can agree to disagree forever

Aumann (1976) derives his famous we cannot agree to disagree result under the assumption of rational Bayesian learning. Motivated by psychological evidence against this assumption, we develop formal models of optimistically, resp. pessimistically, biased Bayesian learning within the framework of Choquet expected utility theory. As a key feature of our approach the posterior subjective beliefs […]

Security and Potential Level Preferences with Thresholds


The security level models of Gilboa (1988) and of Jaffray (1988) as well as the security and potential level model of Cohen (1992) and Essid (1997) successfully accommodate classical Allais paradoxes while they offer an interesting explanation for their occurrence. However, experimental data suggest a systematic violation of these models when lotteries with low probabilities […]

Flexibility of choice versus reduction of ambiguity


This paper explores the problem of a social planner willing to improve the welfare of individuals who are unable to compare all available alternatives. The optimal decision trades off the individuals’ desire for flexibility versus their aversion towards ambiguous choice situations. We introduce an axiom system that formalizes this idea. Our main result characterizes the […]

Deriving a theoretically defensible measure of risk

According to economic theory, risk is a central consideration in financial decision-making. In practice, though, it is difficult to quantify the uncertainty faced by investors, particularly if the aim is to present a risk measure that is consistent with economic theory, is objective and can be replicated.