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Are You Risk Averse over Other People's Money?

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  • Sujoy Chakravarty

    ()
    (Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Mehrauli Road, New Delhi, India 110067)

  • Glenn W. Harrison

    ()
    (Department of Risk Management & Insurance and Center for the Economic Analysis of Risk, Robinson College of Business, Georgia State University, P.O. Box 4036, Atlanta, GA 30302-4036, USA)

  • Ernan E. Haruvy

    ()
    (Department of Marketing, School of Management, University of Texas at Dallas SM 42, 800 West Campbell Road, Richardson, TX 75080-3021, USA)

  • E. Elisabet Rutström

    ()
    (§Robinson College of Business and Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta GA 30302, USA)

Abstract

Decisions 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 Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2011)
Issue (Month): 4 (April)
Pages: 901-913

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Handle: RePEc:sej:ancoec:v:77:4:y:2011:p:901-913

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Cited by:
  1. Dreber, Anna & Rand, David & Wernerfelt, Nils & Worrell, Peter & Zeckhauser, Richard, 2013. "The Decisions of Entrepreneurs and Their Agents: Revealed Levels of Risk Aversion and Betrayal Aversion," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp13-016, Harvard University, John F. Kennedy School of Government.
  2. Filippin, Antonio & Crosetto, Paolo, 2014. "A Reconsideration of Gender Differences in Risk Attitudes," IZA Discussion Papers 8184, Institute for the Study of Labor (IZA).
  3. Kvaløy, Ola & Luzuriaga, Miguel, 2012. "Playing the Trust Game with Other People’s Money," UiS Working Papers in Economics and Finance 2012/17, University of Stavanger.
  4. Natalia Montinari & Michela Rancan, 2013. "Social preferences under risk : the role of social distance," RSCAS Working Papers, European University Institute 2013/90, European University Institute.
  5. Dinky Daruvala, 2007. "Gender, risk and stereotypes," Journal of Risk and Uncertainty, Springer, Springer, vol. 35(3), pages 265-283, December.
  6. Carlsson, Fredrik & Daruvala, Dinky & Jaldell, Henrik, 2008. "Do you do what you say or do you do what you say others do?," Working Papers in Economics, University of Gothenburg, Department of Economics 309, University of Gothenburg, Department of Economics.
  7. Leuermann, Andrea & Roth, Benjamin, 2012. "Does good advice come cheap? - On the assessment of risk preferences in the lab and the field," Working Papers, University of Heidelberg, Department of Economics 0534, University of Heidelberg, Department of Economics.
  8. Andersson, Ola & Holm, Håkan J. & Tyran, Jean-Robert & Wengström, Erik, 2013. "Risking Other People’s Money: Experimental Evidence on Bonus Schemes, Competition, and Altruism," Working Paper Series, Research Institute of Industrial Economics 989, Research Institute of Industrial Economics.
  9. 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.
  10. Seda Ertac & Mehmet Y. Gurdal, 2012. "Personality, Group Decision-Making and Leadership," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1227, Koc University-TUSIAD Economic Research Forum.
  11. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2012. "Responsibility effects in decision making under risk," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2012-402, Social Science Research Center Berlin (WZB).
  12. Andrea Leuermann & Benjamin Roth, 2012. "Does Good Advice Come Cheap?: On the Assessment of Risk Preferences in the Lab and in the Field," SOEPpapers on Multidisciplinary Panel Data Research 475, DIW Berlin, The German Socio-Economic Panel (SOEP).

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