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Where You Stand Affects the Risks You Take: Socially Reference-Dependent Risk Attitudes

How does an individual’s position within a social distribution influence their desire to take risk? Reference-dependent loss aversion (Kahneman and Tversky, 1979; Koszegi and Rabin, 2006, 2007) adapted to a social setting, suggests that individuals may find risk more appealing when they are doing especially well or poorly compared to their peers. We examine the effects of social position on risk attitudes in a simple experiment which allows subjects to take risks at different locations in the social distribution against a realistic backdrop of real effort tasks. Subjects’ reference point under the loss aversion assumption is inferred from their empirical risk-taking patterns. Among subjects assigned to low expected earnings, we find a convex relationship in risk-taking across the social distribution when social information is available, consistent with a reference-point near the social median. For subjects assigned to high expected earnings, risk taking tends to be concave in social position, consistent with having a reference-point near the top of the social distribution. We find supporting evidence for our experimental findings using the National Longitudinal Survey of Youth (NLSY 97), in which similar patterns of risk tendencies across the income distribution are reported among individuals with lower and higher expected lifetime earnings, respectively. In finding different influential reference points among individuals with different expected earnings, our findings suggest that expectations influence reference point selection.