Learning Your Own Risk Preferences

41 Pages Posted: 20 Jul 2022 Last revised: 9 Jan 2023

See all articles by Gary Charness

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics

Nir Chemaya

University of California, Santa Barbara (UCSB)

Dario Trujano-Ochoa

University of California, Santa Barbara (UCSB)

Date Written: January 6, 2023

Abstract

Do people know their own risk preferences, or do risk choices change with experience and observation? We provide a straightforward test in the laboratory. People make an initial decision concerning a lottery choice and then experience 24 unpaid practice periods in which they roll the dice, record the outcome, and record the would-be payoff. They then make a final decision for the lottery choice; one of the first and last periods is randomly chosen for payment. Our primary hypothesis is that people will become less risk-averse by having made and experienced the practice rolls. We do find that people are significantly more likely to become less risk-averse than more risk-averse over time. We note that this move towards assuming increased risk goes in the opposite direction from what is at least arguably predicted by loss aversion and reference dependence. We find that women’s preferences change much less during a session than men’s preferences change. We feel that our literally hands-on approach ensures a degree of engagement that helps to accelerate the learning process. We argue that measures obtained after people have had experience with a mechanism are more meaningful and that this principle might well extend more generally to other elicitation tasks.

Keywords: Risk preferences, experience, uncertainty, experimental methodology

JEL Classification: B49, C81, C91, D81, D83, D91

Suggested Citation

Charness, Gary and Chemaya, Nir and Trujano-Ochoa, Dario, Learning Your Own Risk Preferences (January 6, 2023). Available at SSRN: https://ssrn.com/abstract=4156943 or http://dx.doi.org/10.2139/ssrn.4156943

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-2412 (Phone)
805-893-8830 (Fax)

Nir Chemaya

University of California, Santa Barbara (UCSB) ( email )

Santa Barbara, CA

Dario Trujano-Ochoa (Contact Author)

University of California, Santa Barbara (UCSB) ( email )

South Hall 5504
Santa Barbara, CA 93106
United States

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