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

74 Pages Posted: 9 Jun 2020 Last revised: 23 Feb 2021

See all articles by Rawley Heimer

Rawley Heimer

Boston College - Department of Finance

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 dynamic inconsistency in risky choice. Using a unique brokerage dataset and two preregistered experiments, we compare people's initial risk-taking plans to their subsequent decisions. In both settings, people accept risk as part of a ``loss-exit" strategy---planning to continue taking risk after gains and stopping after losses. Actual behavior follows the reverse pattern, deviating from initial strategies by cutting gains early and chasing losses. More individuals 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 discuss 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)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
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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