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A note on optimal experimentation under risk aversion

R Keller (), Vladimír Novák () and Tim Willems

Journal of Economic Theory, 2019, vol. 179, issue C, 476-487

Abstract: In a standard two-armed bandit setup, this paper shows – counterintuitively – that a more risk-averse decision maker might be more willing to take risky actions. The reason relates to the fact that pulling the risky arm in bandit models produces information on the environment – thereby reducing the risk that a decision maker will face in the future. This finding gives reason for caution when inferring risk preferences from observed actions: in a bandit setup, observing a greater appetite for risky actions can actually be indicative of more risk aversion, not less.

Keywords: Experimentation; Learning; Risk aversion (search for similar items in EconPapers)
JEL-codes: D81 D83 (search for similar items in EconPapers)
Date: 2019
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