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Changing the Probability versus Changing the Reward

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  • David M. Bruner

Abstract

There are two means of changing the expected value of a risk: changing the probability of a reward or changing the reward. Theoretically, the former produces a greater change in expected utility for risk averse agents. This paper uses two formats of a risk preference elicitation mechanism under two decision frames to test this hypothesis. After controlling for decision error, probability weighting, and order effects, subjects, on average, are slightly risk averse and prefer an increase in the expected value of a risk due to increasing the probability over a compensated increase in the reward. There is substantial across-format inconsistency but very little within-format inconsistency at the individual level. Key Words: risk, uncertainty, experiments

Suggested Citation

  • David M. Bruner, 2009. "Changing the Probability versus Changing the Reward," Working Papers 09-04, Department of Economics, Appalachian State University.
    • Handle: RePEc:apl:wpaper:09-04
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    More about this item

    Keywords

    risk; uncertainty; experiments;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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