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Dynamic risk preferences under realized and paper outcomes

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  • Nielsen, Kirby

Abstract

We conduct a large-scale test of dynamic risk preferences. While most of the literature on dynamic risk restricts attention to positively skewed gambles, subjects in our experiment tend to choose negatively skewed lotteries. This allows us to study dynamic risk preferences in an environment that the literature has not analyzed. We find evidence of the reinforcement effect—individuals take on more risk after a gain and take on less risk after a loss. Furthermore, we exogenously vary whether these outcomes are “realized” or on paper, according to the distinction put forth by Imas (2016). We find little difference in the responses to realized and paper outcomes in environments of negatively skewed risk.

Suggested Citation

  • Nielsen, Kirby, 2019. "Dynamic risk preferences under realized and paper outcomes," Journal of Economic Behavior & Organization, Elsevier, vol. 161(C), pages 68-78.
  • Handle: RePEc:eee:jeborg:v:161:y:2019:i:c:p:68-78
    DOI: 10.1016/j.jebo.2019.03.016
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic risk; Reinforcement effect; History-dependent preferences; Prospect theory; Realization effect;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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