Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field
Rawley Heimer, Zwetelina Iliewa, Alex Imas, Martin Weber
American Economic Review · 2025 · Volume 115 · Issue 1
Abstract
We document a robust dynamic inconsistency in risky choice. Using a unique brokerage dataset and a series of experiments, we compare people's initial risk-taking plans to their subsequent decisions. Across settings, people accept risk as part of a loss-exit strategy—planning to continue taking risk after gains and stopping after losses. Actual behavior deviates from initial strategies by cutting gains early and chasing losses. More people accept risk when offered a commitment to their initial strategy. Our results help reconcile seemingly contradictory findings on risk-taking in static versus dynamic contexts. We explore implications for theory and welfare.
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Contingent Pricing, Futures Pricing, option pricing, Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies, Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
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