On Thin Ice: Risk, Return and Crash

26 Pages Posted: 7 Jul 2016 Last revised: 4 Aug 2016

Tobias F. Rötheli

University of Erfurt

Date Written: August 3, 2016

Abstract

This paper describes results from a new experiment for the analysis of the determinants and the effects of economic risk-taking. In each session four subjects interact without communicating with each other. Each of the four subjects chooses three slots for ice fishing on their portion of a frozen lake which has the shape of a square. The farther out on the lake the higher are the returns but also the higher is the risk of a crash and a loss. The results indicate that increasing the steepness of the available return-risk profile leads to a higher frequency of crashes. Bounded rationality in the sense of naïve risk taking does not explain any of the crashes occurring. Instead, behavioral traits of subjects regarding risky choices and their distribution across subjects help to understand performance in a risky environment and the frequency of crises.

Keywords: Risk taking, individual and collective risk, typology of risk takers

JEL Classification: C91, D84, E32, D74

Suggested Citation

Rötheli, Tobias F., On Thin Ice: Risk, Return and Crash (August 3, 2016). Available at SSRN: https://ssrn.com/abstract=2802235 or http://dx.doi.org/10.2139/ssrn.2802235

Tobias F. Rötheli (Contact Author)

University of Erfurt ( email )

Postfach 900 221
Nordhauserstrasse 63
D-99105 Erfurt
Germany
+49 361 737 4531 (Phone)
+49 361 737 4539 (Fax)

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