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Past experience of uncertainty affects risk aversion

Published online by Cambridge University Press:  14 March 2025

Friederike Mengel ,
Elias Tsakas  and
Alexander Vostroknutov
Friederike Mengel*
Affiliation:
Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK Department of Economics (AE1), Maastricht University, PO Box 616, 6200 MD Maastricht, The Netherlands
Elias Tsakas
Affiliation:
Department of Economics (AE1), Maastricht University, PO Box 616, 6200 MD Maastricht, The Netherlands
Alexander Vostroknutov*
Affiliation:
Department of Economics (AE1), Maastricht University, PO Box 616, 6200 MD Maastricht, The Netherlands
*
fr.mengel@gmail.com
a.vostroknutov79@gmail.com
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Abstract

In an experiment with more than 500 participants we study how past experience of uncertainty (imperfect knowledge of the state space) affects risk preferences. Participants in our experiment choose between a sure outcome and a lottery in 32 periods. All treatments are exactly identical in periods 17–32 but differ in periods 1–16. In the early periods of the risk treatment there is perfect information about the lottery; in the ambiguity Treatment participants perfectly know the outcome space but not the associated probabilities; in the unawareness treatment participants have imperfect knowledge about both outcomes and probabilities. We observe strong treatment effects on behavior in periods 17–32. In particular, participants who have been exposed to an environment with very imperfect knowledge of the state space subsequently choose lotteries with high (low) variance less (more) often compared to other participants. Estimating individual risk attitudes from choices in periods 17–32 we find that the distribution of risk attitude parameters across our treatments can be ranked in terms of first order stochastic dominance. Our results show how exposure to environments with different degrees of uncertainty can affect individuals’ subsequent risk-taking behavior.

Keywords

Risk preferencesAmbiguityUnawarenessExperiments

JEL classification

C91: Laboratory, Individual Behavior D81: Criteria for Decision-Making under Risk and Uncertainty D80: General
Type
Original Paper
Information
Experimental Economics , Volume 19 , Issue 1 , March 2016 , pp. 151 - 176
Copyright
Copyright © 2015 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-015-9431-6) contains supplementary material, which is available to authorized users.

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