By: |
Holden, Stein T. (Centre for Land Tenure Studies, Norwegian University of Life Sciences);
Tione, Sarah (Centre for Land Tenure Studies, Norwegian University of Life Sciences);
Katengeza, Samson (Centre for Land Tenure Studies, Norwegian University of Life Sciences);
Tilahun, Mesfin (Centre for Land Tenure Studies, Norwegian University of Life Sciences) |
Abstract: |
Can luck predict risk-taking behavior in games of chance? Economists have not
widely studied this issue although overconfidence, optimism-, and pessimism
bias have received substantial attention in recent years. In this study, we
investigate how good and bad luck outcomes in a simple repeated risky
investment game affect risk-taking behavior in the following rounds of the
same game where the outcome (luck) in the game is determined by the throwing
of a die after each round. The outcome of the previous round's die-throw is
known when the subjects decide how risky their next choice in the game will
be. A sample of 718 university students is used as subjects in the game in a
recursive within-subject design. The results demonstrate a strong impact of
luck on risk-taking behavior that lasts not only to the next round but also
into another two follow-up rounds, with cumulative effects. A time delay of
1-2 months between Round 1 and Round 2 did not wipe out the luck effect and it
was only slightly weaker than the luck effect from Round 2 to Rounds 3 and 4
that followed immediately after Round 2. Many recent studies have shown that
risk preferences respond to recent shocks. This study indicates that random
shocks such as luck in previous games (states of nature) influence risk-taking
behavior. Our study suggests that the causal mechanism goes through subjective
beliefs in luck based on past experiences that influence expectations and
thereby risk-taking behavior. |
Keywords: |
Risky investment game; Luck; Illusion of control; Repeated game; Predictive power. |
JEL: |
D80 H51 |
Date: |
2022–10–29 |
URL: |
http://d.repec.org/n?u=RePEc:hhs:nlsclt:2022_009&r=spo |