“Reconsidering Risk Aversion” with Daniel J. Benjamin, Cornell University
BEHAVIORAL SCIENCES WORKSHOP
ABSTRACT: Measuring risk preferences is challenging because people’s choices over lotteries violate expected-utility axioms and sometimes vary depending on how the lotteries are framed. We develop a two-stage procedure to measure risk preferences, and we demonstrate it via a survey about hypothetical retirement investment choices administered to 601 Cornell students. The first stage is the standard method of eliciting choices over risky lotteries. In the second stage, we confront participants with their inconsistencies—their different responses to choices framed differently that should be the same according to expected-utility axioms—and allow them to update their choices. Our key assumption is that individuals’ updated, “reasoned” choices more closely reflect their preferences than their original, “untutored” choices. We find that on average, participants update in the direction of consistency with expected-utility axioms, and their reasoned choices exhibit less risk aversion than their untutored choices. Our results suggest that deviations from the axioms usually reflect decision errors rather than non-expected-utility preferences. Our two-stage procedure may hold promise as a way to measure risk preferences for the purpose of setting optimal defaults or giving advice about portfolio allocation.
Dr. Daniel Benjamin’s research is in behavioral economics (which incorporates ideas and methods from psychology into economic analysis) and genoeconomics (which incorporates genetic data into economics). Some current research topics include understanding errors people make in statistical reasoning; exploring how best to use survey measures of subjective well-being (such as happiness and life satisfaction) to track national well-being and evaluate policies; and identifying genetic variants associated with outcomes such as educational attainment and subjective well-being.