WP 2010-02 Are You Risk Averse Over Other People’s Money?
Published in 2011 in Southern Economic Journal, Volume 77, Issue 4.
ABSTRACT. Decisions with uncertain outcomes are often made by one party in settings where another party bears the consequences. Whenever an individual is delegated to make decisions that affect others, such as in the typical corporate structure, does the individual make decisions that reflect the risk preferences of the party bearing the consequences? We examine this question in two simple settings, lottery choices and sealed bid auctions, using controlled laboratory experiments. We find that when an individual makes a decision for an anonymous stranger, there is a tendency to exhibit less risk aversion. This reduction in risk aversion is relative to his own preferences, and also relative to his belief about the preferences of others. This result has significant implications for the design of contracts between principals and agents.