Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: In economic models, individuals' risk preferences are typically governed by their preferences over final wealth states. Many scholars have questioned the descriptive validity of this assumption and have indirectly attacked it by posing successful alternative models that do not require it. In this study, we provide a direct assessment of individuals' preferences for wealth integration. We document that subjects overwhelmingly prefer when gambles are preferred in terms of immediate payoff consequences rather than in terms of integrated final wealth. Using this data, we examine the role of several hypothesized deterrents to wealth integration. Our results point to an important role of aversion to complex comparisons. We use these findings to motivate a discussion of the most valuable features of behavioral economic models that extend the expected-utility framework for understanding decision under risk.