Measuring risk aversion with lists: A new bias
AbstractVarious experimental procedures aimed at measuring individual risk aversion involve a list of pairs of alternative prospects. We first study the widely used method by Holt and Laury (2002), for which we find that the removal of some items from the lists yields a systematic decrease in risk aversion and scrambles the ranking of individuals by risk aversion. This bias, that we call embedding bias, is quite distinct from other confounds that have been previously observed in the use of the Holt and Laury method. It may be related to empirical phenomena and theoretical developments where better prospects increase risk aversion. Nevertheless, we also find that the more recent elicitation method due to Abdellaoui et al. (2011), also based on lists but using only one and the same probability in the list, does not display any statistically significant bias when the corresponding items of the list are removed. Our results suggest that methods other than the popular Holt and Laury one may be preferable for the measurement of risk aversion.
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Bibliographic InfoPaper provided by University of California, Davis, Department of Economics in its series Working Papers with number 1223.
Date of creation: 26 Sep 2012
Date of revision:
Risk aversion; risk attitudes; experiments; lists; elicitation method; Holt; Laury; Abdellaoui; Driouchi; l’Haridon; independence axiom; probability weighting;
Find related papers by JEL classification:
- C - Mathematical and Quantitative Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-06 (All new papers)
- NEP-CBE-2012-10-06 (Cognitive & Behavioural Economics)
- NEP-EXP-2012-10-06 (Experimental Economics)
- NEP-UPT-2012-10-06 (Utility Models & Prospect Theory)
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