Learning to Make Risk Neutral Choices in a Symmetric World
Posted: 21 Feb 2001
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: Suggested Citation