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High Stakes Behavior with Low Payoffs: Inducing Preferences with Holt-Laury Gambles

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  • John Dickhaut

    (Economic Science Institute, Chapman University)

  • Daniel Houser

    ()
    (Interdisciplinary Center for Economic Science, George Mason University)

  • Jason A. Aimone

    ()
    (Interdisciplinary Center for Economic Science, George Mason University)

  • Dorina Tila

    ()
    (Interdisciplinary Center for Economic Science, George Mason University)

  • Cathleen A. Johnson

    ()
    (Department of Economics, The University of Arizona)

Abstract

A continuing goal of experiments is to understand risky decisions when the decisions are important. Often a decision’s importance is related to the magnitude of the associated monetary stake. Khaneman and Tversky (1979) argue that risky decisions in high stakes environments can be informed using questionnaires with hypothetical choices (since subjects have no incentive to answer questions falsely.) However, results reported by Holt and Laury (2002, henceforth HL), as well as replications by Harrison (2005) suggest that decisions in “high” monetary payoff environments are not well-predicted by questionnaire responses. Thus, a potential implication of the HL results is that studying decisions in high stakes environments requires using high stakes. Here we describe and implement a procedure for studying high-stakes behavior in a low-stakes environment. We use the binary-lottery reward technique (introduced by Berg, et al (1986)) to induce preferences in a way that is consistent with the decisions reported by HL under a variety of stake sizes. The resulting decisions, all of which were made in a low-stakes environment, reflect surprisingly well the noisy choice behavior reported by HL’s subjects even in their highstakes environment. This finding is important because inducing preferences evidently requires substantially less cost than paying people to participate in extremely high-stakes games.

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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 08-11.

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Length: 22 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:chu:wpaper:08-11

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  1. Houser, Daniel & Vetter, Stefan & Winter, Joachim, 2010. "Fairness and Cheating," Munich Reprints in Economics 19376, University of Munich, Department of Economics.
  2. Rapoport, Amnon & Stein, William E. & Parco, James E. & Nicholas, Thomas E., 2003. "Equilibrium play and adaptive learning in a three-person centipede game," Games and Economic Behavior, Elsevier, vol. 43(2), pages 239-265, May.
  3. Helga Fehr-Duda & Adrian Bruhin & Thomas Epper & Renate Schubert, 2010. "Rationality on the rise: Why relative risk aversion increases with stake size," Journal of Risk and Uncertainty, Springer, vol. 40(2), pages 147-180, April.
  4. Berg, Joyce E, et al, 1986. "Controlling Preferences for Lotteries on Units of Experimental Exchange," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 281-306, May.
  5. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-79, May.
  6. Harrison, Glenn W, 1994. "Expected Utility Theory and the Experimentalists," Empirical Economics, Springer, vol. 19(2), pages 223-53.
  7. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
  8. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  9. Reinhard Selten & Abdolkarim Sadrieh & Klaus Abbink, 1999. "Money Does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Theory and Decision, Springer, vol. 46(3), pages 213-252, June.
  10. Berg, Joyce E & Dickhaut, John W & Rietz, Thomas A, 2003. " Preference Reversals and Induced Risk Preferences: Evidence for Noisy Maximization," Journal of Risk and Uncertainty, Springer, vol. 27(2), pages 139-70, October.
  11. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstr�m, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
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