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Time-inconsistent risk preferences in a laboratory experiment

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  • K. Ko
  • Zhijian Huang

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    Abstract

    We conduct an experiment to explore the time-consistency of risk preferences in a multi-period betting game. Specifically, subjects planned their contingent betting decisions in advance then played the game dynamically later to determine whether their respective decisions matched. We find that subjects took more risk than planned in their initial bet and after losses. In addition, this increased risk was associated with an increase in breakeven mental accounting. Our findings indicate that immediacy of outcomes can lead to impulsive risk-taking behavior and highlight the importance of precommitment to long-term financial planning. Copyright Springer Science+Business Media, LLC 2012

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    File URL: http://hdl.handle.net/10.1007/s11156-011-0264-x
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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 39 (2012)
    Issue (Month): 4 (November)
    Pages: 471-484

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    Handle: RePEc:kap:rqfnac:v:39:y:2012:i:4:p:471-484

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: Experimental economics; Time inconsistency; Risk preference; Mental accounting; Behavioral finance; C91; D81; G14;

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    1. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1775-1798, October.
    2. George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2001. "Projection Bias in Predicting Future Utility," General Economics and Teaching, EconWPA 0012003, EconWPA.
    3. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 631-45, May.
    4. Manel Baucells & Franz H. Heukamp, 2012. "Probability and Time Trade-Off," Management Science, INFORMS, INFORMS, vol. 58(4), pages 831-842, April.
    5. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, INFORMS, vol. 36(6), pages 643-660, June.
    6. Levy, Haim, 1994. "Absolute and Relative Risk Aversion: An Experimental Study," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 289-307, May.
    7. Charles Noussair & Ping Wu, 2006. "Risk tolerance in the present and the future: an experimental study," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 401-412.
    8. Milevsky, Moshe Arye, 1999. " Time Diversification, Safety-First and Risk," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 12(3), pages 271-81, May.
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