Driven by risk: Understanding reference‐dependent preferences using simulated auto racing

Using data from over 56,000 simulated auto races worldwide, we analyze risk‐taking at the margins, consistent with reference‐dependent preferences. We show that participants' risk‐taking changes when a desired intermittent outcome is presented, sometimes at the expense of a more favorable expected end state. Specifically, we find that intermediate kinks in the utility function induce players to take less (more) risk given opportunities to increase (lose) temporal status, providing important intuition regarding the incentives for risk‐taking at the margin of wealth kinks (e.g., retirement age, family changes, etc.). Risk aversion strengthens at kinks, but risk‐taking increases with more individual investment.