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Perceptions of Risk: an Experimental Approach using Internet Questionnaires

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  • Frank A Cowell
  • Guillermo Cruces

Abstract

Building on previous studies on perceptions of inequality, welfare and risk we investigate the structure of individuals' rankings of uncertain prospects in terms of risk and their relationship to individual preferences. We examine three interlinked propositions that are fundamental to the standard economic approach to risk: (i) that rankings by risk are simply the reverse of ranking by preference over distributions with a given mean; (ii) that risk-rankings respect the principle of mean-preserving spreads; (iii) that risk-rankings are independent of whether the individual is personally involved in the gains/losses associated with the uncertain prospects. To do this we use a set of questionnaires implemented through the Virtual Laboratory, a novel experimental setting for the study of normative issues in experimental economics. The results from the questionnaires provide an evaluation of the similitude between individual perceptions of risk and theoretical axioms. They also help identify the individual characteristics that might affect such perceptions.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Distributional Analysis Research Programme Papers with number 70.

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Date of creation: May 2003
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Handle: RePEc:cep:stidar:70

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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Keywords: Inequality; risk; experiment; transfer principle; mean-preserving spread.;

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  1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  2. Yoram Amiel & Frank A Cowell, 2001. "Risk and Inequality Perceptions," STICERD - Distributional Analysis Research Programme Papers 55, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  4. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
  5. Yoram Amiel & Frank Cowell, 2000. "Attitudes towards risk and inequality : a questionnaire-experimental approach," LSE Research Online Documents on Economics 2105, London School of Economics and Political Science, LSE Library.
  6. Amiel,Yoram & Cowell,Frank, 1999. "Thinking about Inequality," Cambridge Books, Cambridge University Press, number 9780521466967, October.
  7. Rothschild, Michael & Stiglitz, Joseph E., 1973. "Some further results on the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 6(2), pages 188-204, April.
  8. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434.
  9. Wulf Gaertner & Jochen Jungeilges, 1999. "Evaluation via extended orderings: empirical findings from west and east," LSE Research Online Documents on Economics 6583, London School of Economics and Political Science, LSE Library.
  10. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  11. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
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