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Past experience of uncertainty affects risk aversion

Author

Listed:
  • Friederike Mengel

    () (University of Essex
    Maastricht University)

  • Elias Tsakas

    (Maastricht University)

  • Alexander Vostroknutov

    () (Maastricht University)

Abstract

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.

Suggested Citation

  • Friederike Mengel & Elias Tsakas & Alexander Vostroknutov, 2016. "Past experience of uncertainty affects risk aversion," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 151-176, March.
  • Handle: RePEc:kap:expeco:v:19:y:2016:i:1:d:10.1007_s10683-015-9431-6
    DOI: 10.1007/s10683-015-9431-6
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    1. repec:kap:theord:v:83:y:2017:i:2:d:10.1007_s11238-017-9594-z is not listed on IDEAS
    2. repec:spr:qualqt:v:51:y:2017:i:4:d:10.1007_s11135-016-0364-8 is not listed on IDEAS
    3. Karni, Edi & Vierø, Marie-Louise, 2017. "Awareness of unawareness: A theory of decision making in the face of ignorance," Journal of Economic Theory, Elsevier, vol. 168(C), pages 301-328.
    4. Wenjun Ma & Burkhard C. Schipper, 2017. "Does exposure to unawareness affect risk preferences? A preliminary result," Theory and Decision, Springer, vol. 83(2), pages 245-257, August.

    More about this item

    Keywords

    Risk preferences; Ambiguity; Unawareness; Experiments;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • 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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