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Money does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse

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Author Info

  • Selten, Reinhard
  • Abdolkarim Sadrieh
  • Klaus Abbink

Abstract

If payoffs are tickets for binary lotteries, which involve only two money prizes, then rationality requires expected value maximization in tickets. This payoff scheme was increasingly used to induce risk neutrality in experiments. The experiment presented here involved lottery choice and valuation tasks. One subject group was paid in binary lottery tickets, another directly in money. significantly greater deviations from risk neutral behavior are observed with binary lottery payoffs. This discrepancy increases when sujects have easy access to the alternatives' expected values and mean absolute deviations. Behavioral regularities are observed at least as often as with direct money payoffs.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 343.

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Length: pages
Date of creation: Dec 1995
Date of revision:
Handle: RePEc:bon:bonsfb:343

Contact details of provider:
Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Binary lottery payoffs; choices under risk; risk preferences; design of experiments; experimental economics;

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  1. Cooper, R. & DeJong, D.V. & Forsythe, R. & Ross, T.W., 1991. "Forward Induction in the Battle of Sexes Games," Working Papers, University of Iowa, Department of Economics 91-19, University of Iowa, Department of Economics.
  2. Abbink, Klaus & Abdolkarim Sadrieh, 1995. "RatImage - research Assistance Toolbox for Computer-Aided Human Behavior Experiments," Discussion Paper Serie B, University of Bonn, Germany 325, University of Bonn, Germany.
  3. Walker, James M & Smith, Vernon L & Cox, James C, 1990. " Inducing Risk-Neutral Preferences: An Examination in a Controlled Market Environment," Journal of Risk and Uncertainty, Springer, Springer, vol. 3(1), pages 5-24, March.
  4. Cox, James C & Oaxaca, Ronald L, 1995. "Inducing Risk-Neutral Preferences: Further Analysis of the Data," Journal of Risk and Uncertainty, Springer, Springer, vol. 11(1), pages 65-79, July.
  5. Berg, Joyce E, et al, 1986. "Controlling Preferences for Lotteries on Units of Experimental Exchange," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 281-306, May.
  6. Cox, James C & Smith, Vernon L & Walker, James M, 1988. " Theory and Individual Behavior of First-Price Auctions," Journal of Risk and Uncertainty, Springer, Springer, vol. 1(1), pages 61-99, March.
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