Time-Inconsistent Risk Preferences in a Laboratory Experiment
18 Pages Posted: 4 Feb 2008
Date Written: January 1, 2008
There is a substantial literature which studies time-inconsistent temporal preferences. We conducted an experiment to explore time-inconsistency in the other dimension of investment preferences, i.e., risk preferences. We had subjects play a multi-period betting game where they planned their betting decisions in advance and then played the game dynamically later to see if these decisions matched their plan. We found that subjects took more risk than planned in their initial bet and after a loss where this increase in risk-taking is associated with an increase in breakeven mental accounting. Our findings shed light on the conditions under which emotions exacerbate mental accounting and other behavioral biases.
Keywords: Experimental economics, Time inconsistency, Decision making, Risk preference, Mental accounting, Behavioral finance
JEL Classification: C91, D81, G14
Suggested Citation: Suggested Citation