Changing the Probability versus Changing the Reward
AbstractThere 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
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Bibliographic InfoPaper provided by Department of Economics, Appalachian State University in its series Working Papers with number 09-04.
Date of creation: 2009
Date of revision:
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Other versions of this item:
- David Bruner, 2009. "Changing the probability versus changing the reward," Experimental Economics, Springer, vol. 12(4), pages 367-385, December.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-14 (All new papers)
- NEP-EXP-2009-03-14 (Experimental Economics)
- NEP-UPT-2009-03-14 (Utility Models & Prospect Theory)
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