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Risk breeds risk aversion

Published online by Cambridge University Press:  14 March 2025

Tai-Sen He  and
Fuhai Hong
Tai-Sen He*
Affiliation:
Division of Economics, School of Social Sciences, Nanyang Technological University, Singapore, Singapore
Fuhai Hong*
Affiliation:
Department of Economics, Lingnan University, Hong Kong, China Division of Economics, School of Social Sciences, Nanyang Technological University, Singapore, Singapore
*
ts.he@ntu.edu.sg
hongfh@gmail.com
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Abstract

We examine whether exposure to a more or less risky environment affects people’s subsequent risk-taking behavior. In a laboratory setting, all subjects went through twelve rounds of multiple-price-list decisions between a risky alternative and a safe alternative. In the first six rounds, subjects were randomly assigned to a high-, moderate-, or low-risk environment, which differed in the variances of the lotteries they were exposed to. In the last six rounds, subjects in all treatments made decisions on an identical set of lotteries. We found that subjects who had experienced a riskier environment exhibited a higher degree of risk aversion. Our experimental design allows us to conclude that this effect is driven by the risk environment per se, rather than the realized outcomes of the risk. This finding has important theoretical and policy implications.

Keywords

RiskRisk aversionLaboratory experiment

JEL classification

C91: Laboratory, Individual Behavior D81: Criteria for Decision-Making under Risk and Uncertainty
Type
Original Paper
Information
Experimental Economics , Volume 21 , Issue 4 , December 2018 , pp. 815 - 835
Copyright
Copyright © 2017 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-017-9553-0) contains supplementary material, which is available to authorized users.

Earlier versions of this paper were circulated under the titles of “Exposure to Risk and Risk Aversion: A Laboratory Experiment” and “Bigger Risk, More Risk Aversion: Experimental Evidence”.

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