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  5. Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field

  • Rawley Heimer
  • Zwetelina Iliewa
  • Alex Imas
  • Martin Weber
American Economic Review (Forthcoming)

Abstract

We document a robust dynamic inconsistency in risky choice. Using a unique brokerage dataset and a series of experiments, we compare people's initial risk-taking plans to their subsequent decisions. Across settings, people accept risk as part of a "loss-exit" strategy—planning to continue taking risk after gains and stopping after losses. Actual behavior deviates from initial strategies by cutting gains early and chasing losses. More people 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 explore implications for theory and welfare.

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