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

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  • 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.

Suggested Citation

  • Rawley Z. Heimer & Zwetelina Iliewa & Alex Imas & Martin Weber, 2023. "Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field," NBER Working Papers 30910, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30910
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    2. Ballestra, Luca Vincenzo & Guizzardi, Andrea & Mazzucchelli, Lorenzo, 2024. "Integrating narrow and wide framing disposition effect: A novel approach incorporating perceived risk and realized asset performance," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 422-432.
    3. Hueber, Laura & Schwaiger, Rene, 2022. "Debiasing through experience sampling: The case of myopic loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 87-138.
    4. Pelster, Matthias, 2024. "Leverage constraints and investors' choice of underlyings," Journal of Banking & Finance, Elsevier, vol. 162(C).
    5. Sang Hu & Jan Obłój & Xun Yu Zhou, 2023. "A Casino Gambling Model Under Cumulative Prospect Theory: Analysis and Algorithm," Management Science, INFORMS, vol. 69(4), pages 2474-2496, April.
    6. Ahn, Yongkil, 2024. "Optimal stopping decisions and the disposition effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    7. Alfonso-Costillo, Antonio, 2021. "Taking risks by flying paper airplanes," MPRA Paper 108541, University Library of Munich, Germany.

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G40 - Financial Economics - - Behavioral Finance - - - General

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