Past experience of uncertainty affects risk aversion

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

In an experiment with more than 500 participants we study how past experience of uncertainty (imperfect knowledge of the state space) affects risk preferences. Participants in our experiment choose between a sure outcome and a lottery in 32 periods. All treatments are exactly identical in periods 17-32 but differ in periods 1-16. In the early periods of the risk treatment there is perfect information about the lottery; in the ambiguity Treatment participants perfectly know the outcome space but not the associated probabilities; in the unawareness treatment participants have imperfect knowledge about both outcomes and probabilities. We observe strong treatment effects on behavior in periods 17-32. In particular, participants who have been exposed to an environment with very imperfect knowledge of the state space subsequently choose lotteries with high (low) variance less (more) often compared to other participants. Estimating individual risk attitudes from choices in periods 17-32 we find that the distribution of risk attitude parameters across our treatments can be ranked in terms of first order stochastic dominance. Our results show how exposure to environments with different degrees of uncertainty can affect individuals’ subsequent risk-taking behavior.

data source: no data
Original languageEnglish
Pages (from-to)151-176
Number of pages26
JournalExperimental Economics
Volume19
Issue number1
Early online date22 Feb 2015
DOIs
Publication statusPublished - Mar 2016

Keywords

  • Risk preferences
  • Ambiguity
  • Unawareness
  • Experiments
  • PARTITIONAL INFORMATION STRUCTURES
  • INTERACTIVE UNAWARENESS
  • AMBIGUITY AVERSION
  • STATE-SPACE
  • PREFERENCES
  • UTILITY
  • CHOICES

Cite this