When Imagining Future Wealth Influences Risky Decision Making

Abstract

The body of literature on the relationship between risk aversion and wealth is extensive. However, little attention has been given to examining how future realizations of wealth might affect (current) risk decisions. Using paired lottery choice experiments and exposing subjects experimentally to imagined future wealth frames, I find that individuals are more risk-seeking if they are asked to imagine that they will be wealthy in the future. Yet I find that individuals are not significantly more risk-averse if they are asked to imagine that they will be poor in the future. I discuss theoretical and policy implications of these findings, including why savings rates are so low in the United States.

Keywords: Risky Decision Making, Framing, Wealth, Savings, Expected Utility

JEL Classification: B49, C91, D03, D81, D91