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Abstract
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Before
Economic theory assumes that investment choices do not depend on the source of the budget. We test this assumption in the lab. In the experiments, we divide participants into two groups: those that obtain an endowment through a windfall and those that obtain the same amount through completing a physical effort task (the ”hard-earned” group). In a previous treatment, we have showed that that individuals in the hard-earned group make less risky and more patient choices than individuals in the windfall group. In the current experiment, we wish to expose the control group to a "settling in" period, so that the control and treated group spend approximately the same amount of time in the lab before making choices.
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After
The proverb "easy come, easy go" tells us that the regret from losing something depends
upon how hard we worked to get it. Normative economic theory assumes, however, that
liquid wealth is fungible irrespective of its source; how a dollar is obtained should not affect
what we buy with that dollar or the risk we are willing to take investing that dollar. Thaler and
Johnson (1990) dispute that claim with a series of experiments demonstrating that people
make different choices with money that has been easily or unexpectedly obtained. Thaler
argues that people behave as if income and expenses are assigned to separate mental
accounts with limited fungibility between accounts (Thaler 1999; Shefrin and Thaler 1988).
Money easily gained is likely to end up in a mental account from which money is easily spent
and readily wagered. Hard earned money is likely to land in a mental account from which
money is more carefully spend and less readily wagered. For most people, most money is of
the earned variety.
In economics laboratory experiments, participants are typically given an endowment
equivalent to a couple of hours’ wages. Such endowments encourage participants to pay
attention, exert more effort, and try to make choices that lead to higher earnings within the
design of the experiment. However, Thaler and Johnson (1990) argue that when people lose
money they consider to be a windfall gain, the loss is likely to be coded as a reduction in the
gain which “doesn’t hurt as much as losing one’s own cash” (p. 657). Thus laboratory
participants who mentally code money given to them in a laboratory as a windfall gain,
distinct and separate from their earned income and savings, may display much less risk
aversion in the laboratory than they do in their daily lives.
Our purpose is to demonstrate that in an experimental laboratory setting subjects asked to
make risky choices take more risk with money they were given by the experimenter than
money they earned. These differences in risk taking are dramatic and raise questions about
inferences drawn from prior risk taking experiments with endowed money.
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Trial Start Date
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Before
February 05, 2017
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March 19, 2023
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Trial End Date
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Before
June 30, 2019
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June 30, 2024
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Last Published
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Before
April 29, 2019 11:00 PM
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After
April 10, 2023 05:50 PM
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Intervention (Public)
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Before
We divide participants into two groups: those that obtain an endowment through a windfall and those that obtain
the same amount through completing a physical effort task (the ”hard-earned” group). We test whether individuals in the hard-earned group make less risky and more patient choices than individuals in the windfall group.
Please note that the experiment is a follow-up on a previously run experiment (and disseminated as a working paper) by Hvide and Lee. For the risk task we follow Holt & Laury (2002).
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After
We divide participants into two groups: those that obtain an endowment through a windfall and those that obtain the same amount through completing a physical effort task (the ”hard-earned” group). We test whether individuals in the hard-earned group make less risky and more patient choices than individuals in the windfall group.
Please note that the experiment is a follow-up on a previously run experiment (and disseminated as a working paper) by Hvide and Lee. For the risk task we follow Holt & Laury (2002).
Subjects in the XLab subject pool at UC Berkeley are invited to participate on a first-come-first-serve basis. There are no other inclusion/exclusion criteria used. We plan to run approximately 10 sessions, with approximately 20 subjects per session each, for a total of 200 subjects.
Subjects from the XLab subject pool are invited via email by XLab staff to participate in one single session, with no follow-up sessions. The experiment should take less than one hour to complete per session. Data collection is through a computer.
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Intervention Start Date
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April 01, 2019
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After
June 30, 2023
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Intervention End Date
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May 31, 2019
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After
June 30, 2024
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Experimental Design (Public)
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Before
We divide participants into two groups: those that obtain an endowment through a windfall and those that obtain
the same amount through completing a physical effort task (peeling potatoes). In the current experiment the control ("windfall") group will have a settling in period of about 30 minutes. Apart from that all the details are the same as in the initial experiment
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After
We divide participants into two groups: those that obtain an endowment through a windfall and those that obtain
the same amount through completing a physical effort task (peeling potatoes). In the current experiment the control ("windfall") group will have a settling in period of about 10 minutes. Apart from that all the details are the same as in the initial experiment
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Planned Number of Clusters
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Before
About 60 individuals in each group, 120 in total
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After
About 100 individuals in each group, 200 in total
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Planned Number of Observations
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Before
About 60 individuals in each group, 120 in total
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After
About 100 individuals in each group, 200 in total
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Sample size (or number of clusters) by treatment arms
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Before
About 60 individuals in each group, 120 in total
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After
About 100 individuals in each group, 200 in total
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Keyword(s)
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Before
Finance
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After
Finance
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Did you obtain IRB approval for this study?
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No
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After
Yes
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Building on Existing Work
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After
No
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