Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field
87 Pages Posted: 9 Jun 2020 Last revised: 27 Aug 2023
Date Written: February 22, 2021
We document a robust dynamic inconsistency in risky choice. Using a unique brokerage dataset and a series of experiments, we compare people's initial risk-taking plans to their subsequent decisions. Across settings, people accept risk as part of a ``loss-exit'' strategy---planning to continue taking risk after gains and stopping after losses. Actual behavior deviates from initial strategies by cutting gains early and chasing losses. More people accept risk when offered a commitment to their initial strategy. Our results help reconcile seemingly contradictory findings on risk-taking in static versus dynamic contexts. We explore implications for theory and welfare.
Keywords: dynamic risk taking, choice under uncertainty, probability weighting, dynamic inconsistency, behavioral economics, retail trading, limit orders
JEL Classification: D01, D09, D9, G4
Suggested Citation: Suggested Citation