Working Paper: NBER ID: w30910
Authors: Rawley Z. Heimer; Zwetelina Iliewa; Alex Imas; Martin Weber
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 inconsistency; risky choice; commitment strategies; behavioral economics
JEL Codes: D01; D90; G40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial risk-taking plans (G11) | subsequent decisions (D70) |
| commitment to initial strategy (L21) | likelihood of risk acceptance (D81) |
| loss-exit plans (G33) | behavior that cuts gains early and chases losses (G41) |
| average gain limit set by participants (C92) | loss limit (G33) |
| dynamic inconsistency (C69) | significant utility costs for individuals (L97) |
| initial strategies (L10) | subsequent decisions (D70) |
| commitment opportunities (D70) | likelihood of risk acceptance (D81) |