Learning Your Own Risk Preferences

Do people know their own risk preferences, or do risk choices change with experience and observation? We provide a clean and straightforward test in the laboratory. People make an initial decision concerning a lottery choice and then experience 24 practice periods in which they roll the dice, record whether the outcome is odd or even, and record the would-be payoff. They then make a final decision for the lottery choice (to avoid hedging, we pay for either the initial or final decision, determined with equal likelihood at the end.). Our primary hypothesis is that people will become less risk-averse by having experienced the practice rolls. In fact, we find that people are significantly more likely to become less risk-averse than more risk-averse over time, with about half of the population making no change. We note that this move towards assuming increased risk goes in the opposite direction from what is at least arguably predicted by loss aversion and reference dependence. Finally, we find evidence that women make more risk-averse choices than men and find some divergence in change behavior across gender