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Understanding the order effect in eliciting risk aversion

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  • Sohn, Kitae

Abstract

Economists have found the order effect in eliciting risk aversion but have failed to explain it. We analyzed a nationally representative Indonesian dataset with a large sample size (13,669 men and 15,590 women) by exploiting the randomized ordering of two sets of questions regarding risk preferences. Probit models, multinomial probit models, and interval regressions were applied. Both men and women became more risk tolerant after they responded to either set of questions. The results are consistent with a well-known phenomenon in psychology: familiarity produces the illusion of control and enhances confidence in oneself.

Suggested Citation

  • Sohn, Kitae, 2019. "Understanding the order effect in eliciting risk aversion," Finance Research Letters, Elsevier, vol. 30(C), pages 314-317.
    • Handle: RePEc:eee:finlet:v:30:y:2019:i:c:p:314-317
    DOI: 10.1016/j.frl.2018.10.014
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    References listed on IDEAS

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    1. repec:pri:cepsud:125krueger is not listed on IDEAS
    2. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
    3. Kitae Sohn, 2017. "The Risk Preferences Of Entrepreneurs In Indonesia," Bulletin of Economic Research, Wiley Blackwell, vol. 69(3), pages 271-287, July.
    4. Daniel Kahneman & Alan B. Krueger & David Schkade & Norbert Schwarz & Arthur A. Stone, 2006. "Would You Be Happier If You Were Richer? A Focusing Illusion," Working Papers 77, Princeton University, Department of Economics, Center for Economic Policy Studies..
    5. Kitae Sohn, 2016. "Risk Incomprehension and Its Economic Consequences," Journal of Development Studies, Taylor & Francis Journals, vol. 52(11), pages 1545-1560, November.
    6. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    7. Steffen Andersen & Glenn Harrison & Morten Lau & E. Rutström, 2009. "Elicitation using multiple price list formats," Experimental Economics, Springer;Economic Science Association, vol. 12(3), pages 365-366, September.
    8. Mahmud Yesuf & Randall A. Bluffstone, 2009. "Poverty, Risk Aversion, and Path Dependence in Low-Income Countries: Experimental Evidence from Ethiopia," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(4), pages 1022-1037.
    9. Kitae Sohn, 2018. "How does the ordering of questions affect elicited time preferences?," Applied Economics Letters, Taylor & Francis Journals, vol. 25(4), pages 244-248, February.
    10. Daniel Kahneman & Alan B. Krueger & David Schkade & Norbert Schwarz & Arthur A. Stone, 2006. "Would You Be Happier If You Were Richer? A Focusing Illusion," Working Papers 77, Princeton University, Department of Economics, Center for Economic Policy Studies..
    11. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutström, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
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    Cited by:

    1. Kong, Hyeongwoo & Yun, Wonje & Kim, Woo Chang, 2023. "Tracking customer risk aversion," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Order effect; Risk aversion; Randomization; Indonesia;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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