Working Paper: NBER ID: w28007
Authors: Daniel J. Benjamin; Mark Alan Fontana; Miles S. Kimball
Abstract: Risk aversion is typically inferred from real or hypothetical choices over risky lotteries, but such “untutored” choices may reflect mistakes rather than preferences. We develop a procedure to obtain a better measure of normatively relevant preferences: after eliciting untutored choices, we confront participants with their choices that are inconsistent with intertemporal-expected-utility axioms and allow them to reconsider their choices. We demonstrate this procedure via a survey about hypothetical retirement investment choices administered to 596 Cornell students. We find that, on average, reconsidered choices are more consistent with almost all axioms, with one exception related to a counterfactual reference point.
Keywords: risk aversion; normative preferences; reconsideration process
JEL Codes: D63; D81; G11; H8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reconsideration process (K41) | improved decision-making (D91) |
| initial untutored choices (Y20) | inconsistency rate (L15) |
| reconsidered choices (D91) | inconsistency rate (L15) |
| reconsideration process (K41) | alignment with normative axioms (D63) |
| initial choices (Y20) | mistakes (Y60) |
| reconsideration process (K41) | better alignment with normative preferences (D63) |