Risk Aversion and Islamic Finance: An Experimental Approach
This article examines the effect of investor's risk aversion on his choice between conventional contract and Islamic contract. The authors focused on the choice of profit loss sharing (PLS) contracts, and to what extent other factors affect choice, such as experience, religion and political factors. Lab experiment approach was applied to test the role of risk aversion, along with other factors, in affecting investor`s choice. The paper concluded that neither Islamic religion views nor risk behavior affect the choice of people with no experience in borrowing. However, inexperienced investors are affected by both political-religious orientation and risk behavior. Such finding, contradicts with the widely held belief that Islamic bank transactions are more suitable for risk-lover depositors and risk-averse borrowers. Furthermore, the paper`s results call for more unique and innovative Banks` marketing strategies specially designed for the pre-experienced investors.
Islamic finance, risk aversion, conventional credit, profit loss sharing (PLS), behavioral finance, Lab experimental Islamic banks
ElMassah, Suzanna Sobhy, "Risk Aversion and Islamic Finance: An Experimental Approach" (2013). All Works. 2989.
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