Nicoletta Marinelli

Do emotions affect insurance demand

Purpose - – The purpose of this paper is to explore how psychological variables are related to real-life insurance consumption. Specifically, the authors focus on whether emotions and psychological traits can improve the predictability of insurance demand, taking traditional socioeconomic variables under control. Design/methodology/approach - – The approach used was in-person survey, based on a traditional questionnaire, the Barratt Impulsiveness Scale and a psycho-physiological task (Iowa Gambling Task (IGT)). Findings - – A selective role of emotions and psychological traits has been proven to exist when comparing different insurance policies. Life and casualty insurance are affected by emotional arousal to losses; indemnity insurance by fear of the unknown, whereas health insurance by impulsivity. Research limitations/implications - – The findings indicate that individual insurance consumption may be amplified by not cognitive components. Future research should concentrate on testing the effect of further psychological traits related to pure risk coverage. Practical implications - – The results may be of interest for insurers in order to know what drives insurance demand with respect to different kinds of pure risks. Social implications - – For policymakers, it is important to understand how psychological factors affect consumer behavior in order to incorporate such perspective into modern insurance policy measures. An analysis of such factors may also increase the self-consciousness of insurance consumers and enrich consumer self-protection. Originality/value - – The authors propose an interdisciplinary approach to analyze insurance demand and test different kinds of insurance coverage, suggesting not homogenous hedging behaviors in relation to specific ambiguous events.

Sovereign Wealth Funds and Target Firms: Does ‘Networking’ Matter?

This paper analyses the impact of Sovereign Wealth Fund (SWF) equity investments on target firm operating performance. Metrics from network analysis are used to investigate whether target firms, that are better connected each other by means of the SWF investments, extract benefits from this network in terms of higher operating performance. The study dataset is made up of 507 SWF acquisition deals worldwide in the time span between 2000 and 2011. Findings indicate that more central firms in the SWF-target firm network enjoybetter operating performance. In addition, the analysis points out that operating performance is higher: (i) the larger the stake acquired, (ii) if the investment is direct and domestic, (iii) if the SWF is run by a politician. Overall, the results reveal that only when a target firm can benefit from the network of both political andcommercial connections created by SWFs, do they enjoy these benefits and gain in operating performance.

Risk Profiling and Current Suitability Practices: What Can Be Learned from a Sample of Italian Householders

According to the Markets in Financial Instruments Directive (MiFID), financial intermediaries are requested to assess the suitability of the products they sell to clients, particularly in respect of retail clients. Supervisory Authorities have pointed out that one of the main problems in the practical implementation of the MiFID suitability rule stems from the omission or impreciseness of the questions addressed to know the customer’s characteristics with specific reference to their risk profile. With this paper we try to shed light on the information an intermediary should collect from customers in order to properly define their risk profile. We analyze a sample of 2995 suitable portfolios and we put their risk composition in relation with some characteristics of the owner. By using the Heckit two-steps estimation procedure we are also able to set apart the variables that mainly explain the risk-holding decision (whether to acquire risky assets) and the risk-allocation decision (what fraction of wealth to invest in these assets). We find that the former decision may be induced by a smaller set of variables, essentially related to the capability of understanding and emotionally bearing the risk, while the latter is more related to the individual economic and financial capacity.

The Traditional Approach to Risk Tolerance

Assessing client risk tolerance is one of the most important, yet most nebulous, activities within the financial planning process. A person’s level of risk tolerance impacts upon a diverse number of financial decisions, such as portfolio management, type of mortgage, insurance deductibles, estate planning, and so on (Roszkowski and Grable, 2005). For years, the need to understand the attitude of investors toward risk has led both academics and practitioners to find reliable tools to assess the risk tolerance of individuals.

An Insight into Suitability Practice: Is a Standard Questionnaire the Answer?

For years, financial intermediaries have been focusing on data and information obtained from customers in order to develop and carry out their Customer Relationship Management (CRM) techniques; they have created and improved models that allow them to split customers into homogeneous groups according to some specific drivers (see Channon, 1985; Anderson and Kerr, 2002; Peelen, 2005). Knowing a customer’s characteristics is crucial to intermediaries for two main reasons: from an ex-ante perspective, they can create products and services which can be specifically marketed and sold to particular segments of customers (customer segmentation); ex post, they make use of the information they obtain from clients in order to provide them with products and services that are suitable to their profile, thus reducing complaints and granting a good level of loyalty (customer profiling). In the literature, much effort is devoted to explaining the main drivers of customer segmentation, while the work on customer profiling is less developed. Nonetheless, the profiling process that financial firms follow to sell financial products and services is crucial, as it paves the way for a fiduciary relationship between the customer and the intermediary. Moreover, it has implications in terms of protecting both the investor and the intermediary. In fact, the information that is obtained from the customer in the profiling process is crucial in each step of the contract: a) before the financial service or product is subscribed, in order to meet the preferences and needs of the investors; b) during the contract, in order to acquire any changes in the needs and preferences of the investor; c) after the end of the contract, in order to protect the intermediary against any complaint that the client could make with reference to a loss that he or she did not expect.

Institutional Investors Networks and Firm Value

This paper investigates the role of institutional investor networks on firm value. Using US data over the period 2001-2013, we document that block-holdings from more central institutional investors (i.e. with larger co-ownership ties) enhance firm value more than those held by other investors. Our findings are consistent with the view that central institutional investors provide a certification benefit to the firm. On the opposite, we do not find evidence that the increase in value is due to monitoring, advisory, or information cost effects. The documented effects are robust to alternative specifications of network centrality and to endogeneity concerns.

Long-Range Financial Decision-Making: The Role of Episodic Prospection

Individuals often show time-inconsistent preferences when making intertemporal choices for monetary rewards. Time-inconsistent preferences generally emerge when observing the devaluation of outcomes over time (temporal discounting) that do not follow an exponential discounting function, but rather hyperbolic discounting. In this paper, we argue that temporal discounting is sensitive to the type of prospection involved. Given that episodic prospection (when individuals can vividly envisage possible future events) increases the subjective importance of a future reward, we investigate if and how it can effectively attenuate human biases of temporal discounting. Our findings suggest that episodic prospection might attenuate intertemporal choice inefficiencies, when in the form of hyperbolic discounting. This was found to be particularly true if the solicited scenario referred to a primary need (a first priority).

The Role of Risk in the Investment Decision Process: Traditional vs Behavioural Finance

Risk and uncertainty exist whenever the future is unknown (Williams et al., 1997). Despite the intuitiveness of the concept, risk and its definition are still a debated issue in the literature. A first point to be discussed is the difference between risk and uncertainty. Knight (1921) maintains that risk refers to a situation for which the possible outcomes and their probabilities are known (measurable uncertainty); on the contrary, uncertainty exists when the probabilities associated to the outcomes are not known (unmeasurable uncertainty). In any case, not all academic authors agree on this distinction. Levy and Sarnat (1995) point out that, if one considers the existence of a subjective probability according to Savage (1954), the distinction between risk and uncertainty disappears. In fact, by assigning an individual subjective probability to decision problems, an uncertain situation can be transformed into a risky choice1 and the distinction loses significance.