Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field
74 Pages Posted: 9 Jun 2020 Last revised: 23 Feb 2021
Date Written: February 22, 2021
We document a dynamic inconsistency in risky choice. Using a unique brokerage dataset and two preregistered experiments, we compare people's initial risk-taking plans to their subsequent decisions. In both settings, people accept risk as part of a ``loss-exit" strategy---planning to continue taking risk after gains and stopping after losses. Actual behavior follows the reverse pattern, deviating from initial strategies by cutting gains early and chasing losses. More individuals 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 discuss implications for theory and welfare.
Keywords: dynamic risk taking, choice under uncertainty, probability weighting, dynamic inconsistency, behavioral economics, retail trading, limit orders
JEL Classification: D01, D09, D9, G4
Suggested Citation: Suggested Citation