Are You Risk Averse Over Other People’s Money?

Sujoy Chakravarty (), Glenn W. Harrison (), Haruvy Ernan E and Rutstrom Elisabet E

No 2005-08-04, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: Abstract. Decisions with uncertain outcomes are often made by one party in settingswhere another party bears the consequences. Whenever an agent is delegated tomake decisions that affect others, such as in the typical corporate structure, does theagent make decisions that reflect the risk preferences of the principal? We examinethis question in the simplest possible setting using controlled laboratory experiments.We find a remarkable result: when an individual makes a decision for an anonymousstranger, he tends to exhibit less risk aversion. This reduction is relative to his ownpreferences, and also relative to his belief about the other’s preferences. This resulthas significant implications for the design of contracts between principals and agents.

New Economics Papers: this item is included in nep-cbe, nep-exp, nep-fmk and nep-mac
Date: 2005-08-16
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