Reference Points and the Tradeoff between Risk and Incentives

Inequality and Risk Preference

“…Recent evidence from laboratory experiments and survey data confirm the implication of theory that individuals' risk appetite increases when falling behind. Dohmen et al (2021) document that participants in a laboratory experiment whose expected earnings would fall below the reference point in a risk-free environment behave risk seeking in risky environments. Schwerter (2022) manipulates a social reference point in a laboratory experiment and shows that participants make less risk averse choices when their peers' earnings are larger, arguably to catch up or surpass these peers.…”