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  3. American Economic Review
  4. January 2025
  5. Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field

  • Rawley Heimer
  • Zwetelina Iliewa
  • Alex Imas
  • Martin Weber
American Economic Review
vol. 115, no. 1, January 2025
(pp. 330–63)
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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.

Citation

Heimer, Rawley, Zwetelina Iliewa, Alex Imas, and Martin Weber. 2025. "Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field." American Economic Review, 115 (1): 330–63. DOI: 10.1257/aer.20210307

Additional Materials

JEL Classification

  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • G13 Contingent Pricing; Futures Pricing; option pricing
  • G24 Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
  • G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]