Impact of Economics Learning on Risk Preferences and Rationality: An Empirical Investigation

Abstract

This study examines whether or not academic experience in economics reduces risk aversion and irrationality. Irrationality was measured by behavioral deviations from Expected Utility Theory (EUT), and adherence to the cognitive limitations described by Prospect Theory (PT). Two survey experiments were administered to economics and non-economics majors at Occidental College to detect risk preferences and exhibition of certainty, framing, reflection and lottery effects as defined in PT. Economics majors were found to have lower risk aversion and different rationality behavior (not always more rational), and these differences were mainly due to self-selection. Economics learning reduced risk aversion and, to a limited degree, irrationality among non-economics students, but not among economics majors. The study also shows that monetary incentives reduced risk aversion, but did not have much impact on rationality.