Decisions under uncertainty in social contexts

Abstract

This paper theoretically and experimentally studies decision-making in risky and social environments. We explore the interdependence of two decisive behavioral determinants in such environments: risk attitudes and social preferences in the form of inequality aversion. Our model and the data demonstrate that individual risk aversion is attenuated when lagging behind peers, whereas it is amplified under favorable income inequality. Moreover, people's choices are not only context-dependent, but they are sensitive to their degree of inequality aversion. The majority of our experimental findings cannot be rationalized by rank-dependent utility models or cumulative prospect theory. Our results contribute to the basic understanding of the underlying motives of social incentives in firms, private households' saving decisions, employees' career-track choices or charitable giving under uncertainty.