Are You Risk Averse over Other People's Money?
AbstractDecisions with uncertain outcomes are often made by one party in settings where another party bears the consequences. Whenever an individual is delegated to make decisions that affect others, such as in the typical corporate structure, does the individual make decisions that reflect the risk preferences of the party bearing the consequences? We examine this question in two simple settings, lottery choices and sealed-bid auctions, using controlled laboratory experiments. We find that when an individual makes a decision for an anonymous stranger, there is a tendency to exhibit less risk aversion. This reduction in risk aversion is relative to his or her own preferences, and it is also relative to his or her belief about the preferences of others. This result has significant implications for the design of contracts between principals and agents.
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Bibliographic InfoArticle provided by Southern Economic Association in its journal Southern Economic Journal.
Volume (Year): 77 (2011)
Issue (Month): 4 (April)
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
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- Natalia Montinari & Michela Rancan, 2013. "Social Preferences under Risk: the Role of Social Distance," Jena Economic Research Papers 2013-050, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- Paolo Crosetto & Antonio Filippin & Janna Heider, 2013. "A Study of Outcome Reporting Bias Using Gender Differences in Risk Attitudes," CESifo Working Paper Series 4466, CESifo Group Munich.
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