Distinguishing Risk Preferences using Repeated Gambles

• URL: http://arxiv.org/abs/2308.07054v1
• Date: Mon, 14 Aug 2023 10:27:58 GMT
• Title: Distinguishing Risk Preferences using Repeated Gambles
• Authors: James Price, Colm Connaughton
• Abstract summary: Sequences of repeated gambles provide an experimental tool to characterize risk preferences of humans or artificial decision-making agents. We show that it becomes increasingly difficult to distinguish the risk preferences of agents as their wealth increases.
• Score: 0.0
• License: http://creativecommons.org/licenses/by/4.0/
• Abstract: Sequences of repeated gambles provide an experimental tool to characterize the risk preferences of humans or artificial decision-making agents. The difficulty of this inference depends on factors including the details of the gambles offered and the number of iterations of the game played. In this paper we explore in detail the practical challenges of inferring risk preferences from the observed choices of artificial agents who are presented with finite sequences of repeated gambles. We are motivated by the fact that the strategy to maximize long-run wealth for sequences of repeated additive gambles (where gains and losses are independent of current wealth) is different to the strategy for repeated multiplicative gambles (where gains and losses are proportional to current wealth.) Accurate measurement of risk preferences would be needed to tell whether an agent is employing the optimal strategy or not. To generalize the types of gambles our agents face we use the Yeo-Johnson transformation, a tool borrowed from feature engineering for time series analysis, to construct a family of gambles that interpolates smoothly between the additive and multiplicative cases. We then analyze the optimal strategy for this family, both analytically and numerically. We find that it becomes increasingly difficult to distinguish the risk preferences of agents as their wealth increases. This is because agents with different risk preferences eventually make the same decisions for sufficiently high wealth. We believe that these findings are informative for the effective design of experiments to measure risk preferences in humans.

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