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Are risk preferences optimal?

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  • Skjold, Benjamin
  • Steinkamp, Simon Richard
  • Connaughton, Colm
  • Hulme, Oliver J
  • Peters, Ole

Abstract

Decision theories commonly assume that risk preferences are idiosyncratic but stable over time. A recent model from ergodicity economics reveals that optimising the growth rate of wealth requires individuals to adjust their risk preferences to wealth dynamics. Here we ask whether humans are capable of such adjustments. In a randomised control trial, participants will make risky decisions under additive and multiplicative dynamics. We will estimate risk preferences separately in the two conditions for each participant by fitting isoelastic utility functions via hierarchical Bayesian models and standard regression techniques. Growth optimal adjustments to risk preferences would confirm our main hypothesis, whereas risk preferences that are stable across conditions would disconfirm it. Pilot data from 11 participants revealed strong evidence supporting the main hypothesis. We will replicate this pilot in a pre-registered experiment with up to 150 participants.

Suggested Citation

  • Skjold, Benjamin & Steinkamp, Simon Richard & Connaughton, Colm & Hulme, Oliver J & Peters, Ole, 2023. "Are risk preferences optimal?," OSF Preprints ew2sx_v1, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:ew2sx_v1
    DOI: 10.31219/osf.io/ew2sx_v1
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