Risky Choice in the Limelight

Guido Baltussen, Martijn J. van den Assem, and Dennie van Dolder

In our professional and private lives, we often face risky choices under varying degrees of public scrutiny. Mapping the influence of scrutiny on behaviour is therefore an important step in further broadening the scope of our understanding of risky choice. Also, from a methodological point of view, it is useful to know to what extent findings on risk preferences from behavioural experiments generalize to real world situations with more scrutiny.

This Nottingham School of Economics working paper, in the Review of Economics and Statistics, examines to what extent public scrutiny affects risk behaviour. Dennie van Dolder and his co-authors conducted two experiments mimicking the game of the TV show Deal or No Deal. In both experiments, they employed laboratory and limelight treatments. In the laboratory treatments, subjects made decisions in the anonymity of a standard, computerized laboratory setting as typically employed in economic experiments. In the limelight treatments, subjects made their choices in a simulated game show environment, which included a live audience, a game show host, and video cameras. In both experiments, they find that subjects are substantially more risk averse in the limelight. However, the qualitative patterns in risk behaviour are not affected: in both conditions, subjects take more risk if the game develops either substantially worse or significantly better than earlier expectations. As a result, a simple prospect theory model with a path-dependent reference point, able to capture such path dependency, provides a better explanation for subjects’ behaviour than a flexible specification of expected utility theory. In addition, their findings suggest that ambiguity aversion depends on being in the limelight, that passive experience has little effect on risk taking, and that reference points are determined by imperfectly updated expectations. 

Review of Economics and Statistics, “Risky Choice in the Limelight” by Guido Baltussen, Martijn J. van den Assem, and Dennie van Dolder.

http://dx.doi.org/10.1162/REST_a_00505

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