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Are People Risk Vulnerable?

Mickael Beaud () and Marc Willinger ()

Management Science, 2015, vol. 61, issue 3, 624-636

Abstract: We report on a within-subject experiment, with substantial monetary incentives, designed to test whether or not people are risk vulnerable. In the experiment, subjects face the standard portfolio choice problem in which the investor has to allocate part of his wealth between one safe asset and one risky asset. We elicit risk vulnerability by observing each subject's portfolio choice in two different contexts that differ only by the presence or absence of an actuarially neutral background risk. Our main result is that most of the subjects are risk vulnerable: 81% chose a less risky portfolio when exposed to background risk. More precisely, 47% invested a strictly smaller amount in the risky asset, whereas 34% were indifferent. Furthermore, contrasting the predictions provided by competing decision-theoretic models, we conclude that expected utility theory best fits our experimental data. This paper was accepted by Uri Gneezy, behavioral economics.

Keywords: background risk; incomplete markets; portfolio choice; risk vulnerability; lab experiment (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:inm:ormnsc:v:61:y:2015:i:3:p:624-636