Variable risk preferences and adaptive aspirations |
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| Affiliation: | 1. School of Accounting, Economics and Finance, Deakin University, PO Box 423, Warrnambool 3280, Australia;2. Griffith School of Engineering, Gold Coast Campus, Griffith University, QLD 4222, Australia;3. School of Accounting, Economics and Finance, Deakin University, Burwood 3125, Australia;1. Faculty of Business and Economics, TU Dresden, D-01062 Dresden, Germany;2. Department of Economics, University of Mannheim, D-68131 Mannheim, Germany;3. Faculty of Social Sciences, University of Oslo, Postboks 1095 Blindern 0317 Oslo, Norway;1. Department of Psychology, Yale University, 2 Hillhouse Ave, New Haven, CT, USA;2. Hill/Levene Schools of Business, University of Regina, Regina, Saskatchewan, Canada;3. Department of Psychiatry, Yale University, 300 George Street, New Haven, CT, USA |
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| Abstract: | Observations of human decision making indicate that risk preferences depend on the values of possible outcomes relative to levels of aspiration. A model of such variable risk preference is specified. It suggests that some risk averse behavior may result from a human tendency to focus on targets and from the adaptation of those targets to experience rather than from a fixed trait of risk aversion. In addition, the model shows how risk preferences varying around adaptive aspirations produce both a greater long-run likelihood of survival and a higher average return for survivors than do fixed risk preferences. |
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