Learning from mistakes: What do inconsistent choices over risk tell us?
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We implement a risk experiment that allows for judgment errors to investigate who makes mistakes and whether it matters. The experiments are conducted with a random sample of the adult population in Rwanda, and data on financial decisions are collected. We find a high proportion of inconsistent choices, with over 50% of the participants making at least one mistake. Importantly, errors are informative. While risk aversion alone does not explain financial decisions, risk aversion and inconsistent choices interact in significant and sensible ways. As we would expect, risk-averse individuals are more likely to belong to a savings group and less likely to take out an informal loan. For those more likely to make mistakes, however, as they become more risk averse, they are less likely to belong to a savings group and more likely to take up informal credit, suggesting that mistakes correlate with less than optimal behavior.
KeywordsRisk preferences Inconsistent choices Financial decisions Experiments
JEL ClassificationC91 D81
Petrie thanks the World Council of Credit Unions (WOCCU) for funding the survey and allowing us the use of the data. We also thank Marco Castillo, James Cox and Vjollca Sadiraj for the helpful comments. Suggestions from an anonymous referee and the editor greatly improved the paper.
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