The Effect of Perceived Similarity on Sequential Risk Taking

Abstract

The authors examine how perceived similarity between sequential risks affects individuals’ risk-taking intentions. Specifically, in six studies, the authors find that, in sequential choice settings, individuals exhibit significant positive state dependence in risk-taking preferences, such that they are more likely to take a risk when it is similar to a previously taken risk than when it is dissimilar. For example, if an individual has previously taken a health/safety risk, that individual is more likely to take a second health/safety risk than a second risk that is in the financial domain. The authors show that because similarity between risks is malleable and can be determined by situational and contextual variables, subsequent risk-taking intentions can be changed in a predictable manner when similarity is manipulated through framing. The authors establish that increased feelings of self-efficacy and self-signaling through the prior risk-taking experience drive state-dependent risk-taking preferences. The authors further show that the effect of similarity on preferences is not moderated by the outcome received in the prior risk and holds when controlling for individual-level and domain-specific heterogeneity. Taken together, the results demonstrate that the similarity structures that exist between risks have a significant effect on risk-taking preferences in dynamic choice settings.