Cultural Finance

The following sections are included:

• About the Authors
• Acknowledgments
• Contents

Risk and time are central to the understanding of economics. In today’s colorful and multicultural world, it is therefore only natural to wonder how and why attitudes toward risk and time differ internationally…

Time is money, and therefore it is only natural that we start our book with a chapter on time and culture. While time runs with the same speed for every culture in the world, the way time is valued and spent seems to vary a lot across countries. At least this is what most people will think when you ask them about, for example, differences between Southern and Northern Europe or between South and North America. In some countries, everything seems to happen at a slower speed. Tourists enjoy the slow pace of life in some exotic countries, while expats and foreign business people in the same country curse the slow pace of work in companies or government offices. For them, time is closely related to efficiency…

We present results from the first large-scale international survey on time preference, conducted in 53 countries. All countries exhibit hyperbolic discounting patterns, i.e., the immediate future is discounted more than far future. We also observe higher heterogeneity for shorter time horizons, consistent with the pattern reviewed by Frederick, Loewenstein and O’Donoghue (2002). Cultural factors as captured by the Hofstede cultural dimensions (Hofstede, 1991) contribute significantly to the variation of time discounting, even after controlling for economic factors, such as GDP, inflation rate and growth rate. In particular, higher levels of Uncertainty Avoidance are associated with stronger hyperbolic discounting, whereas higher degrees of Individualism and Long Term Orientation predict stronger tendency to wait for larger payoffs. We also find the waiting tendency is correlated with innovation, environmental protection, crediting rating, and body mass index at country level after controlling for county wealth. These results help us to enhance the understanding of differences across financial markets and economic behavior worldwide.

When eliciting time preferences with typical trade-off questions between the present and the future, we do not measure only the discounting factor. Instead, there are several other factors that may influence answers. This is, on the one hand, due to the shape of the subject’s utility function, and, on the other hand, due to the possibility to “hedge” choices by saving or taking a loan. In this chapter, we develop theoretical predictions for the impact of wealth, growth rate, and risk aversion on preferences between intertemporal choices. In our model, access to financial markets is limited (a crucial factor leading to very different predictions as compared to the classical case of complete market access). We confirm the predictions of our model using data from a large international survey on time discounting, conducted in 53 countries.

Two decades after the dissolution of the Soviet Union and the German reunification, do we still see the long-lasting effects of communist influence? If so, how can we make sure that this difference is really caused by communism and not, say, a long-lasting cultural difference that predates communism, or is instead the result of the chaotic events following the end of communism?…

The INTRA data only consist of university students. This is, on the one hand, convenient as it allows one to capture between-country differences accurately. On the other hand, it is of course also interesting to look at different groups of people and use the INTRA data as a handy benchmark…

Risk is such a universal concept that we barely think about it when we encounter it. And, we do encounter it all the time! Let us just think about health-related risk: we risk our health when we cross a road since we might be run over by a car. We take a risk when we play sports since we might get injured. But, if we do not play any sports, we risk our health as well. In most of these instances, the risk involves only tiny probabilities, but still there is a risk. And then, this is only about health. There are so many other kinds of risks we encounter in our daily life! Financial risk is only one of them, but of course the one we care about most in this chapter…

We present results from a large-scale international survey on risk preferences conducted in 53 countries. In all countries, we find, on average, an attitude of risk aversion in gains and of risk seeking in losses. The degree of risk aversion shows significant cross-country differences. Moreover, risk attitudes in our sample depend not only on economic conditions but also on cultural factors, as measured by the Hofstede dimensions individualism and uncertainty avoidance. The data may also serve as an interesting starting point for further research on cultural differences in behavioral economics. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1869.

Based on the literature on the relationship between culture, emotion, and loss aversion, we derive that culture can influence the degree of loss aversion. To test our hypotheses, we conduct a standardized survey in 53 countries worldwide that includes the questions from the Hofstede survey on cultural dimensions as well as lottery questions on loss aversion. The results show that individualism, power distance, and masculinity increase loss aversion as predicted, whereas the impact of uncertainty avoidance is less significant. Moreover, we also find a relation between the distribution of major religions in a country and loss aversion. In comparison, the connection of loss aversion to macroeconomic variables seems to be much smaller. Copyright © 2016 John Wiley & Sons, Ltd.

We conduct a standardized survey on risk preferences in 53 countries worldwide and estimate cumulative prospect theory parameters from the data. The parameter estimates show that significant differences on the cross-country level are to some extent robust and related to economic and cultural differences. In particular, a closer look on probability weighting underlines gender differences, economic effects, and cultural impact on probability weighting. The data set is a useful starting point for future research that investigates the impact of risk preferences on the market level.

We observe that the standard variant of Prospect Theory cannot describe very risk-averse choices in simple lotteries. This makes it difficult to accommodate it with experimental data. Using an exponential value function can solve this problem and allows to cover the whole spectrum of risk-averse behavior. Further evidence in favor of the exponential value function comes from the evaluation of data from a large scale survey on preferences over lotteries where the exponential value function produces the best fits. The results enhance the understanding on what types of lotteries pose potential problems for the classical value function.

To understand the effects of culture and institutions on preferences, in particular the potential impacts of political histories such as the Czarist rule in Russia and the communist regime in East Europe, Schaewitz et al. (2019) studied the INTRA data for the European countries, and additionally analyzed the SOEP (Socio-Economic Panel) and PANDA surveys…

Gender roles are arguably one of the key differences between cultures. Women do not enjoy the same rights as men in all countries, and even if they theoretically do, their rights might be limited by customs and informal rules. Moreover, gender roles can still vary markedly between countries in which women and men indeed have the same rights…

In financial markets, households and firms trade income over time, contingent on events, i.e., they borrow and save, buy and sell insurance and they bet on the outcome of events. Some households save for their pension, others borrow by taking mortgages. Firms invest into more or less risky projects, while some hold cash and others distribute it to their shareholders. Traditional finance assumes that these important decisions only depend on economic variables like the interest rate and the risk and return trade-off offered by financial markets. Yet, our studies based on INTRA show that these economic variables are not sufficient to explain the international differences in financial market behavior…

We examine time discounting factors in an international survey. Our analysis reveals a significant relationship between time discount factors and historical equity premiums across 27 countries. This result implies that higher historical equity risk premiums are observed in countries where survey participants tend to be more short-term oriented. This finding is consistent with the explanation of the equity premium puzzle provided by myopic loss aversion. (JEL: G02, G11, D81)

Ambiguity aversion has been suggested as a potential explanation for the equity premium puzzle in recent theoretical models. To test this hypothesis, we measure the amount of ambiguity aversion in a large-scale international survey. A comparison to the average equity premia in these countries demonstrates that ambiguity aversion does, indeed, have a significant influence on the amount of equity risk premium, even when controlling for macroeconomic parameters. Finally, we connect differences in ambiguity aversion to differences in uncertainty avoidance, one of Hofstede’s cultural dimensions.

Stocks are riskier than bonds. This causes a risk premium for stocks. That the size of this premium, however, seems to be larger than risk aversion alone can explain the so-called “equity premium puzzle”. One possible explanation is the inclusion of a degree of ambiguity in stock returns to account for an additional ambiguity premium, whose size depends on the degree of ambiguity aversion among investors. It is, however, difficult to test this empirically. In this paper, we compute the first firm-level estimation of equity premium based on the internal rate of return (IRR) approach for a total of N = 28,256 companies in 54 countries worldwide. Using a survey of international data on ambiguity aversion, we find a strong and robust relation between equity premia and ambiguity aversion.

In this chapter, we summarize results from Hens and Schindler (2020) on the influence of time discounting on value premium. We will see that in a consumption-based asset pricing model with hyperbolic discounting — leading to dynamically inconsistent time preferences — the value premium increases nonlinearly with the degree of discounting and thus affects cross section of returns. To test this model, Hens and Schindler (2020) relate the size of the value premium in 41 countries to the degree of hyperbolic discounting across those countries, using the INTRA data. The result is robust to the inclusion of other variables from INTRA, such as risk aversion, as well as micro and macroeconomic variables from the 41 countries.

This paper examines how ambiguity aversion and information uncertainty jointly influence the momentum effect across countries. Most countries in our sample exhibit information uncertainty effect, i.e., the momentum effect is stronger for firms with greater uncertainty (e.g., smaller, younger, and more volatile firms). Moreover, we find that such information uncertainty effect is stronger in countries with lower degree of ambiguity aversion. The interaction effect of uncertainty and ambiguity aversion is mainly driven by losers, suggesting the information avoidance or “Ostrich Effect”. We offer two possible explanations for this result based on the potential impacts of ambiguity aversion on information reaction and information seeking.

We study a model that relates dividend payout policy to behavioral issues based on the ideas of mental accounting. A panel analysis across 29 countries and over 43,000 firm-years demonstrates that our model studying the relation between dividends and patience, loss aversion, and ambiguity aversion can be verified empirically. Our paper seems to be the first that highlights empirically in a straightforward way the relevance of behavioral patterns as important determinants for corporate dividend policy, while previous empirical studies could tackle this issue only indirectly. With several robustness tests we also address potential doubts concerning the quality of our data and analyze further implications of our theory.

Previous literature on cash management has revealed that firms hoard cash to protect themselves against external financing constraints that might limit future capital budgeting policies. In a theoretical model based on this finding, we analyze how investors’ attitude toward uncertain investment returns affects the valuation of cash and the amount of cash holdings. Subsequently, we show empirically that cash holdings become less valuable with increasing ambiguity aversion in line with our model. We also demonstrate that managers react accordingly and lower cash holdings if their investors tend to be more ambiguity-averse. Several robustness tests confirm our findings.

Despite the well-known benefits of international diversification and global market integration, most investors still allocate proportionally too much domestic assets and too little foreign assets in their portfolio (French and Poterba, 1991). Various explanations have been proposed to explain this so-called home bias puzzle, including rational justifications such as differences in corporate governance and investor protection (Dahlquist et al., 2003), informational advantages (Brennan and Cao, 1997; Grinblatt and Keloharju, 2001) hedging domestic inflation (Cooper and Kaplanis, 1994), as well as less rational reasons such as familiarity biases (Huberman, 2001), patriotism (Morse and Shive, 2011) and overoptimism (French and Poterba, 1991; Weber et al., 2005)…

This article jointly analyses a behavioural and a cultural concept to explain household debt portfolio choice. The behavioural approach explores the role of time preferences on household debt maturity in a theoretical model and a numerical analysis. We derive a positive relationship between the long-term discount factor δ and the optimal maturity of household loans. The cultural approach examines whether national culture is a reasonable predictor for household debt maturity. We show that culture is an important factor for households’ borrowing decisions and has even more predictive power than time preferences. Countries with higher scores on the Hofstede dimension of long-term orientation tend to have shorter household debt maturity. Time preferences incur a primarily mediating role, because the effect of national culture on the borrowing decision is reduced, as the long-term discount factor δ increases.

The following section is included:

• Epilogue Applications and Alternative Measures