Social Preferences under Risk - An Experimental Analysis

Traditional economic theory assumes individuals to be entirely rational actors who are solely maximizing their own utility. However, various experimental studies show that individuals do not necessarily conform to the behavioral assumption of Homo economicus. Many subjects do not solely focus on their own material gain but also care about fairness and equality. In contrast to previous research, this study addresses the persistence of these social preferences when risk comes into play. In our daily lives, we have to take many decisions which have consequences for other people. At the same time, many of these come with potential risks to one’s own and to other people’s utility. For instance, a student who allows his classmate to copy in an exam has to weigh off his willingness to share his knowledge against the risk of being caught and punished. In the workplace, employees have to decide whether or not to behave in a fair manner towards their colleagues and share important information, even though this may reduce their chances of being promoted. In order to investigate the interaction of social preferences and risk, the first part of the experiment elicits subjects’ individual risk preferences. Here, subjects are faced with several choice problems each of which requires them to choose between a certain amount of money and a lottery where the latter offers to gain a small or a large amount of money by tossing a coin. In the second part of the experiment, subjects are randomly paired. The same choice problems are repeated but now the subject’s decisions also have consequences for the (potential) amount of money which another, anonymous subject receives. Finally, the payoffs for both subjects are determined by one random decision. The results indicate that many people are willing to bear more risk (or to forego a larger potential gain) when this increases the payoff of another, anonymous subject who would otherwise receive a very small payoff or nothing at all. The largest deviations from individual risk preferences are observed when the payoffs for both subjects can be perfectly equalized. By contrast, the subjects’ choices also suggest that envy causes a crowding out of benevolent behavior when the other subject is able to receive a better payoff than the decision maker. The observations provide further evidence that a need for fairness and equality fundamentally influences individual decision-making processes.

Bradler, Christiane (2009), Social Preferences under Risk - An Experimental Analysis, ZEW Discussion Paper No. 09-077, Mannheim.