Ruhr Economic Papers

Ruhr Economic Papers #508

Higher-order Risk Preferences in Social Settings - An Experimental Analysis

by Timo Heinrich and Thomas Mayrhofer

UDE, 10/2014, 36 S./p., 8 Euro, ISBN 978-3-86788-583-6 DOI: 10.4419/86788583

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Abstract

We study higher-order risk preferences, i.e. prudence and temperance, next to risk aversion in social settings. Previous experimental studies have shown that higher-order risk preferences affect the choices of individuals deciding privately on lotteries that only affect their own pay-off. Yet, most risky and financially relevant decisions in the field are made in the social settings of households or organizations. We aim to narrow the gap between laboratory and field evidence by creating a more realistic decision making environment in the laboratory that allows us to identify the influence of different social settings under controlled conditions. We elicit higher-order risk preferences of individuals and systematic ally vary how an individual’s decision is made (alone or while communicating with a partner) and who is affected by the decision (only the individual or the partner as well). In doing so, we can isolate the effects of other-regarding concerns and communication on choices. We observe that individuals become more risk-averse when the partner is able to communicate with the decision maker. However, we do not observe an influence of social settings on prudence and temperance. Our results reveal that the majority of choices are risk-averse, prudent, and temperate across social settings.

JEL-Classification: C91, C92, D70, D81

Keywords: Experiment; individual decisions; group decisions; risk aversion; prudence; temperance

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