Risk is relative: Risk aversion yields cooperation rather than defection in cooperation-friendly environments

Previous findings concerning the relation of risk aversion and cooperation in repeated prisoner's dilemma games have been inconclusive. We hypothesized that this was due to an interaction between personality and environment. Specifically, we argued that in cooperation-friendly environments--given certain beliefs--defection is more risky than cooperation. The main reason for this is that, in such a situation, defection potentially yields outcomes of higher variance (and vice versa, for cooperation-unfriendly environments). In line with this hypothesis, we showed, in two experiments and a reanalysis of a study by Fudenberg, Rand, and Dreber (American Economic Review, in press), that the degree of cooperation increases with dispositional risk aversion in cooperation-friendly environments, but not in cooperation-unfriendly environments. We also found similar person-situation interactions for neuroticism and extraversion.