Learning to Make Risk Neutral Choices in a Symmetric World

Posted: 21 Feb 2001

See all articles by Stefano DellaVigna

Stefano DellaVigna

University of California, Berkeley; National Bureau of Economic Research (NBER)

Marco LiCalzi

Dept. Management, Università Ca' Foscari Venezia

Abstract

Given their reference point, most people tend to be risk averse over gains and risk seeking over losses. Therefore, they exhibit a dual risk attitude which is reference dependent. This paper studies an adaptive process for choice under risk where, while maintaining reference-dependent preferences in the short run, the agent eventually learns to make risk neutral choices.

The agent repeatedly faces a choice problem over monetary lotteries. At each period, she picks a lottery that maximizes the probability of meeting the current target. Right after, she plays the lottery and adjusts her reference point for the next period in the direction of the actually experienced payoff. In the long-run, the reference point settles down to a specific value and the choice behavior converges to maximization of the expected value. However, at each period the agent maintains a dual risk attitude. Therefore, learning to make risk neutral choices takes place without the agent ever learning to be risk neutral.

JEL Classification: D81, D83.

Suggested Citation

DellaVigna, Stefano and LiCalzi, Marco, Learning to Make Risk Neutral Choices in a Symmetric World. Available at SSRN: https://ssrn.com/abstract=257356

Stefano DellaVigna (Contact Author)

University of California, Berkeley ( email )

Economics Department
549 Evans Hall #3880
Berkeley, CA 94720
United States
510-643-0715 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/sdellavi/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marco LiCalzi

Dept. Management, Università Ca' Foscari Venezia ( email )

San Giobbe, Cannaregio 873
Venice, 30121
Italy
+39-0412346925 (Phone)
+39-0412347444 (Fax)

HOME PAGE: http://venus.unive.it/licalzi/

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