Academic journal article Economic Inquiry

Risk Taking for Oneself and Others: A Structural Model Approach

Academic journal article Economic Inquiry

Risk Taking for Oneself and Others: A Structural Model Approach

Article excerpt

I. INTRODUCTION

The focus of decision theory has long been on individual decision processes, whereby the decision maker is the only person affected by her decisions. In many situations, however, financial decisions have payoff consequences affecting not only the decision maker herself but also others--be they family members, or principals for whom an agent is called to make a decision. We focus on situations where incentives are perfectly aligned between agent and principal (e.g., a chief executive officer compensated in restricted company stock; a family head who administers the finances for the household). The question, then, is whether decisions taken when responsible for somebody else's payoffs as well as one's own differ from decisions taken in the purely individual context. The answer to this question has implications for whether what we know from the wide-ranging literature on individual decisions can be directly applied to such situations of responsibility, or not.

We are interested in situations of payoff equality, in which a decision maker and a passive other (whom we shall refer to as recipient) are affected by the payoffs resulting from a decision in a symmetric fashion. Economic theory makes no predictions about this type of situation, and in general, interactions between risk preferences and other-regarding behavior are poorly understood (Guth, Levati, and Ploner 2008). Bolton and Ockenfels (2010) found no difference between a situation of individual decisions and one in which the decision maker and the recipient were equally affected by the decisions. Pahlke, Strasser, and Vieider (2015) studied decisions under payoff equality for the gain and loss domain, as well as for different probabilities and for mixed gain-loss prospects. They concluded that responsibility increased risk aversion for moderate to large probability prospects in the gain domain (a finding later replicated by Bolton, Ockenfels, and Stauf 2015), but increased risk seeking for moderate probability losses and small probability gains, pointing to an accentuation of the fourfold pattern of risk attitudes found under prospect theory (PT) (Tversky and Kahneman 1992). They found no effect of responsibility on mixed gain-loss prospects. Humphrey and Renner (2011) found no effect of responsibility using a price-list design popularized by Holt and Laury (2002). Andersson et al. (2014) estimated a structural model of decision making and found no effect of responsibility on utility curvature, but found loss aversion to be reduced relative to individual decisions in situations of payoff equality.

Choice situations involving payoff equality must be distinguished from a number of other decision situations, which, while being related, differ from it in one or more important aspects. Most closely related are situations in which an agent decides for a principal without any consequences to herself, and which compare such an agency choice to individual decisions the agent takes for herself. Investigating such a situation, Chakravarty et al. (2011) found increased risk taking in decisions for others. Reynolds, Joseph, and Sherwood (2009), however, found agents to be more risk averse when deciding for a group of three to five others than when deciding for themselves. Eriksen and Kvaloy (2010) investigated myopic loss aversion using an investment task (Gneezy and Potters 1997) and found risk taking to decrease in decisions for others. Using the same task, Pollmann, Potters, and Trautmann (2014) found risk taking to increase when making decisions for others. In agreement with the last results, Polman (2012) found loss aversion to decrease in decisions for others in a simple choice task. (1) Other more remotely related studies concern situations in which payoffs accrue to others in strategic game settings (see e.g., Chamess and Jackson 2009), or in group decisions (e.g., Sutter 2009)--see Trautmann and Vieider (2012) for an overview. We will henceforth concentrate on situations of payoff equality, but will return to these related studies in the discussion. …

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