American Economic Review 115 (1): 330–363
Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field
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.
Keywords: dynamic inconsistency, risk-taking, loss chasing, realization of gains, commitment devices, prospect theory, brokerage data, lab experiments.
In brief
People’s plans for taking risk differ systematically from what they actually do once outcomes arrive.
Using brokerage account data and a series of experiments, the paper shows that people typically plan to keep taking risk after gains and to stop after losses, but in practice they do the reverse: they cash out gains early and keep chasing losses. When offered a way to commit to their original plan, more people are willing to take the risk in the first place. The findings help reconcile why studies of one-shot gambles and studies of ongoing, repeated risk-taking often reach different conclusions about people’s appetite for risk.
| Panel A. Design | ||
|---|---|---|
| Question | Do people follow through on their plans for taking risk once gains or losses arrive? | |
| Setting | Retail brokerage accounts and a series of experiments | |
| Data | A unique brokerage dataset and experimental choices | |
| Method | Comparison of people’s initial risk-taking plans with their later decisions, including when a commitment to the plan is offered | |
| Panel B. Main findings | ||
| Planned strategy | Keep taking risk after gains, stop after losses | |
| Actual behavior | Cash out gains early and chase losses | |
| Offering commitment to the plan | More people accept the risk | |
Summarized from the paper. See the paper for exact estimates and specifications.
Read and cite
- Published version, American Economic Review
- Working paper version, SSRN
- DOI: 10.1257/aer.20210307
Heimer, Rawley Z., Zwetelina Iliewa, Alex Imas, and Martin Weber. 2025. “Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field.” American Economic Review 115 (1): 330–363. https://doi.org/10.1257/aer.20210307.
@article{heimer2025dynamic,
author = {Heimer, Rawley Z. and Iliewa, Zwetelina and Imas, Alex and Weber, Martin},
title = {Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field},
journal = {American Economic Review},
volume = {115},
number = {1},
pages = {330--363},
year = {2025},
doi = {10.1257/aer.20210307},
url = {https://www.aeaweb.org/articles?id=10.1257/aer.20210307}
}
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