Malleable Risk Preferences and Learning from Experience in an Asset Allocation Game

Does experience modulate elicited risk preferences? How does experience shape expectations? This paper provides evidence that investors’ own experiences play a key role in shaping revealed risk preferences and the weighting of past observations when forming expectations. The results suggest that experiencing severe negative or positive returns leads subjects’ revealed preferences to become closer to risk neutrality, while subsequent asset allocation is affected primarily by subjects’ own returns relative to the market and not by the market experience itself, indicating that agents’ performance relative to a benchmark is what matters in shaping expectations.