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Time-inconsistent risk preferences in a laboratory experiment

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  • K. Ko
  • Zhijian Huang

Abstract

We conduct an experiment to explore the time-consistency of risk preferences in a multi-period betting game. Specifically, subjects planned their contingent betting decisions in advance then played the game dynamically later to determine whether their respective decisions matched. We find that subjects took more risk than planned in their initial bet and after losses. In addition, this increased risk was associated with an increase in breakeven mental accounting. Our findings indicate that immediacy of outcomes can lead to impulsive risk-taking behavior and highlight the importance of precommitment to long-term financial planning. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • K. Ko & Zhijian Huang, 2012. "Time-inconsistent risk preferences in a laboratory experiment," Review of Quantitative Finance and Accounting, Springer, vol. 39(4), pages 471-484, November.
    • Handle: RePEc:kap:rqfnac:v:39:y:2012:i:4:p:471-484
    DOI: 10.1007/s11156-011-0264-x
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    References listed on IDEAS

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    Cited by:

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    2. Mousumi Singha Mahapatra & Jayasree Raveendran & Anupam De, 2019. "Building a Model on Influence of Behavioural and Cognitive Factors on Personal Financial Planning: A Study Among Indian Households," Global Business Review, International Management Institute, vol. 20(4), pages 996-1009, August.

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    More about this item

    Keywords

    Experimental economics; Time inconsistency; Risk preference; Mental accounting; Behavioral finance; C91; D81; G14;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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