Risky Business : Are economic agents (ir)rational?

Abstract: This study tests whether if heuristics affect the decisions of an economic agent. Through different sets of lottery games conducted on students, the participants made choices between an uncertain asset and a risk-free asset. Instead of the classical approach, I chose to relate the uncertain asset to a financial asset and the risk-free asset to a cash payment placed in a savings account. The game contained a total of six rounds, where the participants made choices on different level of risk for the first three rounds. In the remaining three rounds the participants made choices on the same level of risk do distinguish if past experience affected their risk preference. The experimental results show that when the risk environment change, participants in the low risk environment became more risk averse, as oppose to participants in the high risk environment. The results also show that when exposed to avolatile environment, participants tend to switch to the safe option earlier compared to when stakes are low. However, when the participants made choices on the same level of risk, the switch from the lottery to the safe option did not differ between the participants. In other words, past experience did not seem to aect the valuation of the asset. In this experiment, women tend to be more risk averse than men. On average, women switched to the safe option earlier than the men.