Increased risk-taking, not loss tolerance, drives adolescents’ propensity to choose risky prospects more often under peer observation

Abstract

Relative to adults, adolescents make more welfare-decreasing decisions, especially in the presence of peers. The consequences of these decisions result in substantial individual and societal losses in terms of lives lost, injury, hospitalization costs, and foregone opportunities. In this paper, we use laboratory within-subject and between-subject experiments with younger (12–17 years old) and older (18–24 years old) adolescents to identify which economic preference is affected by peer observation in adolescence — risk tolerance in gains, risk tolerance in losses, and/or loss aversion. We find that in our study, while observed by peers, 18–24-year-old adolescents became more risk-tolerant both in gains and in losses but more loss averse. We discuss the potential mechanisms driving the result and its policy implications.