WP 2010-03 Behavior Towards Endogenous Risk in the Laboratory

Posted On January 3, 2010
Categories Working Papers, WP 2010

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ABSTRACT. We consider the effect of allowing for endogenous risk on behavior, in the simplest possible laboratory environment that allows us to identify effects on risk attitudes and subjective beliefs. We find that risk attitudes and subjective beliefs are indeed significantly affected by the possibility that choices might alter the probabilities in the lotteries being considered. Our design considers the evaluation of risk, and risk mitigating behavior, in a virtual environment that reflects the risk of property destruction from a forest fire. We jointly elicit risk attitudes, subjective beliefs and mitigating choices, and estimate a structural model that allows us to identify the effects of allowing for endogeneity of risk. We find evidence that endogenous risk settings do cause subjects to employ different subjective beliefs than they use in an exogenous risk setting, although risk attitudes appear stable across these settings.