Post by Sapphire Capital on Jul 11, 2008 6:59:43 GMT 4
How Can Beta be Saved in the Face of Loss Aversion?
ARVIND ASHTA
Burgundy School of Business (ESC Dijon), France - CEREN
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Abstract:
Beta is based on co-variance, a bi-directional measure of risk implying that below-the-average and above-the-average variations are treated symmetrically. Loss aversion, however, treats losses differently from gains. Thus, if the range of possible outcomes for a project includes losses, the use of variance, co-variance and beta are put into doubt. The paper examines possible ways to save the use of beta for discounted cash flow analysis. This would affect the fair value of future cash flows which needs to be disclosed in accounting documents. The use of such formulae would also reduce agency problems if entrepreneurs and shareholder convey their loss aversion rate to managers (and top managers to lower level managers). This would also focus governments to understand what can be done to reduce loss aversion.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1135812_code473010.pdf?abstractid=1123511&mirid=3
ARVIND ASHTA
Burgundy School of Business (ESC Dijon), France - CEREN
--------------------------------------------------------------------------------
Abstract:
Beta is based on co-variance, a bi-directional measure of risk implying that below-the-average and above-the-average variations are treated symmetrically. Loss aversion, however, treats losses differently from gains. Thus, if the range of possible outcomes for a project includes losses, the use of variance, co-variance and beta are put into doubt. The paper examines possible ways to save the use of beta for discounted cash flow analysis. This would affect the fair value of future cash flows which needs to be disclosed in accounting documents. The use of such formulae would also reduce agency problems if entrepreneurs and shareholder convey their loss aversion rate to managers (and top managers to lower level managers). This would also focus governments to understand what can be done to reduce loss aversion.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1135812_code473010.pdf?abstractid=1123511&mirid=3