Choosing a gambling partner: testing a model of mutual insurance in the lab

In this study, we investigate how economic agents choose gambling partners and how paired risky choices differ from individual ones. To this aim, we develop a simple model and design a laboratory experiment that allows us to compare individual versus paired decisions across two treatments, where pairs are, respectively, exogenously and endogenously formed. In both treatments, paired subjects decide individually and independently how to allocate their wealth over a portfolio of lotteries and fully commit to share any winnings. The main result from our experiment is that whenever agents are allowed to choose a gambling partner they decide to team up with other agents who display the same degree of risk aversion as themselves. Moreover, paired choices consistently involve higher risk taking than individual choices. This finding is more evident when information on subjects’ risk attitudes is made available and when subjects team up in homogeneous pairs, thereby confirming that subjects successfully exploit the benefits of mutual insurance.