Time-Inconsistent Risk Preferences in a Laboratory Experiment
21 Pages Posted: 18 Mar 2010
Date Written: September 1, 2009
We conducted an experiment to explore the time-consistency of risk preferences in a multi-period betting game. Specifically, subjects planned their contingent betting decisions in advance then played the game dynamically later to determine whether their respective decisions matched. We found that subjects took more risk than planned in their initial bet and after losses. In addition, this increased risk was associated with an increase in breakeven mental accounting. Our findings indicate that immediacy of outcomes can lead to impulsive risk-taking behavior and highlight the importance of precommitment to long-term financial planning.
Keywords: Experimental economics, Time inconsistency, Risk preference, Mental accounting, Behavioral finance
JEL Classification: C91, D81, G14
Suggested Citation: Suggested Citation