Variable risk preferences and adaptive aspirations

Abstract

Observations of human decision making indicate that risk preferences depend on the values of possible outcomes relative to levels of aspiration. A model of such variable risk preference is specified. It suggests that some risk averse behavior may result from a human tendency to focus on targets and from the adaptation of those targets to experience rather than from a fixed trait of risk aversion. In addition, the model shows how risk preferences varying around adaptive aspirations produce both a greater long-run likelihood of survival and a higher average return for survivors than do fixed risk preferences.