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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Delay-Dependent Risk Tolerance - An Experimental Study |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 69 |
| Date | 2018 |
| Abstract Text | Experimental evidence shows that risk tolerance for future prospects is higher than for immediate ones, which can have profound implications for many aspects of life. The Missing-Link Model by Epper and Fehr-Duda (2015) explains higher risk tolerance for future prospects by the risk inherent in the future in conjunction with people’s proneness to Allais-type common-ratio violations. The latter is a characteristic of probability weighting and constitutes preference reversals for a pair of prospects as a consequence of scaling down the probabilities p of the best outcomes. Future risk, which reduces the probability of prospect survival, shifts the probability weighting function upwards and thereby increases risk tolerance. Moreover, the reduced curvature of the weighting function implies a decreasing proneness to common-ratio violations. The purpose of this thesis is to examine several predictions of the Missing-Link Model by means of a laboratory experiment with monetary incentives. The task of the subjects was to determine the sure amount payable at time t that was considered as being equivalent to the risky prospect paid out at t. Although the study does not provide evidence of increased risk tolerance for future prospects, the results support several other predictions of the model. There is evidence of increased risk tolerance for future prospects with p = 90% and p = 10% when the future is perceived as more uncertain. This impression was conveyed by a priming manipulation. The manipulation check suggests that future risk may stem from mistrust of other people which makes people feel that future prospects are less likely to survive. Further results indicate that the valuation of delayed prospects with p = 50% is higher when the final outcome is revealed at the payment date rather than immediately. Moreover, there is evidence that risk tolerance for future prospects with p = 90% increases with the degree of departure from linear probability weighting. The results for the sample of prospects with all levels of p indicate that risk tolerance increases with future risk and the departure from linear probability weighting. Therefore, the Missing-Link Model can make important contributions to theories of decision making. |
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