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Estimating risk attitudes in conventional and artefactual lab experiments: The importance of the underlying assumptions

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  • Drichoutis, Andreas C.
  • Koundouri, Phoebe

Abstract

In this paper we assess the importance of sample type in the estimation of risk preferences. We elicit and compare risk preferences from student subjects and subjects drawn from the general population, using the multiple price list method devised by Holt and Laury in their paper Risk Aversion and Incentive Effects (2002). We find evidence suggesting that under rank dependent utility, students exhibit approximately risk neutral preferences while subjects drawn from the general population exhibit risk loving preferences. However, when we assume an incorrect characterization of risk preferences, in particular we adopt the framework of expected utility theory, our estimation results lead to erroneous inferences. In this case, students are on average risk averse, while subjects drawn from the general population exhibit risk neutrality. Our results have implications for economic policy making under uncertainty. --

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2012-38
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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 6 (2012)
Issue (Month): 38 ()
Pages: 1-15

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Handle: RePEc:zbw:ifweej:201238

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Keywords: risk aversion; CRRA; expo-power; rank dependent utility; multiple price list;

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References

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  1. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  2. Glenn Harrison & John List, 2004. "Field experiments," Artefactual Field Experiments 00058, The Field Experiments Website.
  3. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstr�m, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
  4. Karagiannis, Giannis, 1999. "Proportional Profit Taxes And Resource Management Under Production Uncertainty," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
  5. Xavier Vollenweider & Salvatore Di Falco & Cathal O’Donoghue, 2011. "Risk preferences and voluntary agrienvironmental schemes: does risk aversion explain the uptake of the Rural Environment Protection Scheme?," Grantham Research Institute on Climate Change and the Environment Working Papers 48, Grantham Research Institute on Climate Change and the Environment.
  6. Wilcox, Nathaniel, 2007. "Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk," MPRA Paper 11851, University Library of Munich, Germany.
  7. Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2007. "Estimating Risk Attitudes in Denmark: A Field Experiment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 341-368, 06.
  8. Phoebe Koundouri & Marita Laukkanen & Sami Myyrä & Céline Nauges, 2009. "The effects of EU agricultural policy changes on farmers' risk attitudes," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 36(1), pages 53-77, March.
  9. Harrison, Glenn W. & Lau, Morten I. & Elisabet Rutström, E., 2009. "Risk attitudes, randomization to treatment, and self-selection into experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 70(3), pages 498-507, June.
  10. 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.
  11. Steffen Andersen & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem, 2011. "Discounting Behavior: A Reconsideration," Working Papers 2011_01, Durham University Business School.
  12. Lisa R. Anderson & Jennifer M. Mellor, 2008. "Are Risk Preferences Stable? Comparing an Experimental Measure with a Validated Survey-Based Measure," Working Papers 74, Department of Economics, College of William and Mary.
  13. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  14. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  15. Sheryl Ball & Catherine C. Eckel & Maria Heracleous, 2008. "Risk Aversion and Physical Prowess: Prediction, Choice and Bias," Working Papers e07-11, Virginia Polytechnic Institute and State University, Department of Economics.
  16. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, E. Elisabet, 2010. "Preference heterogeneity in experiments: Comparing the field and laboratory," Journal of Economic Behavior & Organization, Elsevier, vol. 73(2), pages 209-224, February.
  17. Murat Isik, 2002. "Resource Management under Production and Output Price Uncertainty: Implications for Environmental Policy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(3), pages 557-571.
  18. Phoebe Koundouri & Céline Nauges & Vangelis Tzouvelekas, 2006. "Technology Adoption under Production Uncertainty: Theory and Application to Irrigation Technology," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(3), pages 657-670.
  19. Glenn Harrison & E. Rutström, 2009. "Expected utility theory and prospect theory: one wedding and a decent funeral," Experimental Economics, Springer, vol. 12(2), pages 133-158, June.
  20. Chetan Dave & Catherine Eckel & Cathleen Johnson & Christian Rojas, 2010. "Eliciting risk preferences: When is simple better?," Journal of Risk and Uncertainty, Springer, vol. 41(3), pages 219-243, December.
  21. Drichoutis, Andreas & Lusk, Jayson, 2012. "Judging statistical models of individual decision making under risk using in- and out-of-sample criteria," MPRA Paper 38951, University Library of Munich, Germany.
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Cited by:
  1. Paolo Crosetto & Antonio Filippin & Janna Heider, 2013. "A Study of Outcome Reporting Bias Using Gender Differences in Risk Attitudes," CESifo Working Paper Series 4466, CESifo Group Munich.
  2. Filippin, A. & Crosetto, P., 2014. "A reconsideration of gender differences in risk attitudes," Working Papers 2014-01, Grenoble Applied Economics Laboratory (GAEL).

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