Drichoutis, Andreas and Lusk, Jayson (2012): Risk preference elicitation without the confounding effect of probability weighting.
Download (399kB) | Preview
In this paper we show that the wildly popular Holt and Laury (2002) risk preference elicitation method confounds estimates of the curvature of the utility function, the traditional notion of risk preference, with an estimate of the extent to which an individual weights probabilities non-linearly. We show that a slight modification to their approach can remove the confound while preserving the simplicity of the method which has made it so popular. Data from a laboratory experiment shows that our new method yields significantly different levels of implied risk aversion than the Holt and Laury task even after econometrically controlling for probability weighting in the latter. Implied risk aversion from the traditional Holt and Laury task is relatively insensitive to payout amount, but our new method reveals increasing relative risk aversion and risk neutrality at low payout amounts.
|Item Type:||MPRA Paper|
|Original Title:||Risk preference elicitation without the confounding effect of probability weighting|
|Keywords:||expected utility theory, experiment, probability weighting, rank dependent utility, risk|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Andreas Drichoutis|
|Date Deposited:||30. Mar 2012 20:32|
|Last Modified:||15. Sep 2015 16:21|
Andersen, S., G.W. Harrison, M.I. Lau, and E.E. Rutstrom. (2008). Eliciting risk and time preferences. Econometrica 76:583-618.
Andersen, S., G.W. Harrison, M.I. Lau, and E.E. Rutström. (2011). Discounting behavior: A reconsideration. Center for the Economic Analysis of Risk, Working Paper 2011-03.
Becker, G.M., M.H. Degroot, and J. Marschak. (1964). Measuring utility by a single-response sequential method. Behavioral Science 9:226-232.
Bellemare, C., and B. Shearer. (2010). Sorting, incentives and risk preferences: Evidence from a field experiment. Economics Letters 108:345-348.
Binswanger, H.P. (1980). Attitudes toward risk: Experimental measurement in rural India. American Journal of Agricultural Economics 62:395-407.
Binswanger, H.P. (1981). Attitudes toward risk: Theoretical implications of an experiment in rural India. The Economic Journal 91:867-890.
Bruner, D., M. McKee, and R. Santore. (2008). Hand in the cookie jar: An experimental investigation of equity-based compensation and managerial fraud. Southern Economic Journal 75:261-278.
Camerer, C.F., and T.-H. Ho. (1994). Violations of the betweenness axiom and nonlinearity in probability. Journal of Risk and Uncertainty 8:167-196.
Eckel, C.C., and R.K. Wilson. (2004). Is trust a risky decision? Journal of Economic Behavior and Organization 55:447-465.
Fischbacher, U. (2007). z-Tree: Zurich Toolbox for Ready-made Economic Experiments. Experimental Economics 10:171-178.
Glöckner, A., and G. Hochman. (2011). The interplay of experience-based affective and probabilistic cues in decision making. Experimental Psychology 58:132-141.
Greiner, B. (2004). An Online Recruitment System for Economic Experiments. In: Kurt Kremer, Volker Macho (Hrsg.): Forschung und wissenschaftliches Rechnen. GWDG Bericht 63. Ges. für Wiss. Datenverarbeitung, Göttingen, 79-93.
Harrison, G.W., E. Johnson, M.M. McInnes, and E.E. Rutström. (2005). Risk aversion and incentive effects: Comment. The American Economic Review 95:897-901.
Harrison, G.W., M.I. Lau, and E.E. Rutström. (2009). Risk attitudes, randomization to treatment, and self-selection into experiments. Journal of Economic Behavior and Organization 70:498-507.
Hey, J.D., and C. Orme. (1994). Investigating generalizations of expected utility theory using experimental data. Econometrica 62:1291-1326.
Holt, C.A., and S.K. Laury. (2005). Risk aversion and incentive effects: New data without order effects. The American Economic Review 95:902-904.
Lusk, J.L., and K.H. Coble. (2005). Risk perceptions, risk preference, and acceptance of risky food. American Journal of Agricultural Economics 87:393-405.
Quiggin, J. (1982). A theory of anticipated utility. Journal of Economic Behavior and Organization 3:323-343.
Tversky, A., and D. Kahneman. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5.
Wakker, P., and D. Deneffe. (1996). Eliciting von Neumann-Morgenstern utilities when probabilities are distorted or unknown. Management Science 42:1131-1150.
Wilcox, N.T. (2011). ‘Stochastically more risk averse:’ A contextual theory of stochastic discrete choice under risk. Journal of Econometrics 162:89-104.
Wu, G., and R. Gonzalez. (1996). Curvature of the Probability Weighting Function. Management Science 42:1676-1690.
Available Versions of this Item
Risk preference elicitation without the confounding effect of probability weighting. (deposited 30. Mar 2012 20:32)
- Risk preference elicitation without the confounding effect of probability weighting. (deposited 31. Mar 2012 22:30)