Skip to main content
SpringerLink
Log in

Comparing behavior under risk and under ambiguity in a lifecycle experiment

  • Published:
Theory and Decision Aims and scope Submit manuscript

Abstract

Experiments on intertemporal consumption typically show that people have difficulties in optimally solving such problems. Previous studies have focused on contexts in which agents are faced with risky future incomes and have to plan over long horizons. We present an experiment comparing decision making under certainty, risk, and ambiguity, over a shorter lifecycle. Results show that behavior in the ambiguity treatment is markedly different than in the risk condition and it is characterized by a significant pattern of under-consumption.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. For a review see, among others, Deaton (1992) and Browning and Lusardi (1996).

  2. For an account, see (Fehr and Zych 1998; Ballinger et al. 2003, 2011; Carbone and Hey 2004; Hey 2008; Brown et al. 2009).

  3. Having set the discount rate equal to zero, \(\beta \) equals 1, so the same can be expressed by: \(E(U(c_t)+U(c_{t+1})+\cdots +U(c_T))\).

  4. See among others, Deaton (1992) and Stokey et al. (1989).

  5. Starred variables indicate optimal choices.

  6. The optimization programs were written using Maple.

  7. This was omitted in the case of ambiguity.

  8. Participants were also provided with tables showing some examples of conversions and of the interest mechanism.

  9. Given our experimental design, the theoretical maximum utility corresponds to the maximum payment that subjects could achieve.

  10. Here we refer to the “ex-post” optimum, i.e., the optimal solution calculated after income realizations.

  11. Further discussions on the concepts of conditional and unconditional optima can be found in Ballinger et al. (2003) and Carbone and Hey (2004).

  12. The tables of the estimated planning horizons, relative to the three treatments, as well as the results of the statistical tests are available on request.

  13. A table reporting optimal and average actual ratios (with their standard deviations) and deviations, is available on request.

  14. Period 5 is not relevant because participants were clearly instructed that “leftovers” after the last periods would be lost.

  15. Which was the case in this experiment as there was a fresh draw from the ambiguous bag after each round of each sequence.

References

  • Ballinger, T., Palumbo, M., & Wilcox, N. (2003). Precautionary saving and social learning across generations: An experiment. The Economic Journal, 113(490), 920–947.

    Article  Google Scholar 

  • Ballinger, T. P., Hudson, E., Karkoviata, L., & Wilcox, N. T. (2011). Saving behavior and cognitive abilities. Experimental Economics, 14(3), 349–374.

    Article  Google Scholar 

  • Brown, A., Chua, Z., & Camerer, C. (2009). Learning and visceral temptation in dynamic saving experiments. Quarterly Journal of Economics, 124(1), 197–231.

    Article  Google Scholar 

  • Browning, M., & Lusardi, A. (1996). Household saving: Micro theories and micro facts. Journal of Economic Literature, 34(4), 1797–1855.

    Google Scholar 

  • Carbone, E., & Hey, J. (2004). The effect of unemployment on consumption: An experimental analysis. The Economic Journal, 114(497), 660–683.

    Article  Google Scholar 

  • Deaton, A. (1992). Understanding consumption (Clarendon Lectures in Economics). Oxford: Oxford University Press.

  • Fehr, E., & Zych, P. K. (1998). Do addicts behave rationally? Scandinavian Journal of Economics, 100(3), 643–662.

    Article  Google Scholar 

  • Fischbacher, U. (2007). z-tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178.

    Article  Google Scholar 

  • Hey, J. (2008). Exploring the experimental economics approach in pensions. Working Paper 43, Department for Work and Pensions.

  • Hey, J., & Dardanoni, V. (1988). Optimal consumption under uncertainty: An experimental investigation. The Economic Journal, 98(390), 105–116.

    Article  Google Scholar 

  • Stokey, N. L., Lucas, R. E., & Prescott, E. (1989). Recursive methods in economic dynamics. Cambridge: Harvard University Press.

    Google Scholar 

Download references

Acknowledgments

We are grateful to John Hey for useful comments and suggestions.

Author information

Authors and Affiliations

  1. Seconda Università di Napoli, Corso Gran Priorato di Malta n.1, 81043 , Capua, CE, Italy

    Enrica Carbone

  2. School of Economics, University of East Anglia, Norwich Research Park, Norwich, NR4 7TJ, UK

    Gerardo Infante

Authors
  1. Enrica Carbone
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Gerardo Infante
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Enrica Carbone.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Carbone, E., Infante, G. Comparing behavior under risk and under ambiguity in a lifecycle experiment. Theory Decis 77, 313–322 (2014). https://doi.org/10.1007/s11238-014-9443-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11238-014-9443-2

Keywords

Search

Navigation