Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field

81 Pages Posted: 9 Jun 2020 Last revised: 24 Jan 2023

See all articles by Rawley Heimer

Rawley Heimer

Arizona State University (ASU) - W.P. Carey School of Business

Zwetelina Iliewa

University of Bonn - Department of Economics

Alex Imas

University of Chicago - Booth School of Business

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: February 22, 2021

Abstract

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

Heimer, Rawley and Iliewa, Zwetelina and Imas, Alex and Weber, Martin, Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field (February 22, 2021). Available at SSRN: https://ssrn.com/abstract=3600583 or http://dx.doi.org/10.2139/ssrn.3600583

Rawley Heimer (Contact Author)

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Zwetelina Iliewa

University of Bonn - Department of Economics ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

Alex Imas

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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