Where You Stand Affects the Risks You Take: Socially Reference-Dependent Risk Attitudes

55 Pages Posted: 25 Jul 2015 Last revised: 26 Dec 2020

See all articles by Jaimie W. Lien

Jaimie W. Lien

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics

Jie Zheng

Tsinghua University - School of Economics & Management

Date Written: September 10, 2015

Abstract

How does an individual’s position within a social distribution influence their desire to take risk? Reference-dependent loss aversion (Kahneman and Tversky, 1979; Koszegi and Rabin, 2006, 2007) adapted to a social distribution setting, suggests that individuals could find risk more appealing at the tails of the distribution. We analyze this question in a laboratory experiment which allows subjects to take risks at different locations in the social distribution, against a realistic backdrop of real effort. Among subjects randomly assigned to low expected earnings, we find a convex relationship between risk-taking and social position consistent with a reference-point near the social median. However, for subjects assigned to high expected earnings, risk-taking tends to be concave in social position, consistent with having a reference-point near the top of the distribution. We find additional support for this empirical pattern using the National Longitudinal Survey of Youth (NLSY 97), in which similar patterns of convex and concave self-reported risk attitudes across the income distribution are documented among individuals with lower and higher expected lifetime earnings, respectively. The survey data results suggest that the risk-taking patterns found in the controlled laboratory setting have external validity in broader contexts. Finally, our finding that social reference points differ among individuals based on their expected earnings is consistent with a hypothesis of expectations-based reference point selection.

Keywords: social preferences, risk attitudes, reference-dependence, reference point selection

JEL Classification: D01, D03, D31, D81

Suggested Citation

Lien, Jaimie W. and Zheng, Jie, Where You Stand Affects the Risks You Take: Socially Reference-Dependent Risk Attitudes (September 10, 2015). Available at SSRN: https://ssrn.com/abstract=2635424 or http://dx.doi.org/10.2139/ssrn.2635424

Jaimie W. Lien (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong

Jie Zheng

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

HOME PAGE: http://jzheng.weebly.com/

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