Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Ratio Bias Phenomenon : Fact or Artifact ?

Contents:

Author Info

  • Mathieu Lefebvre

    ()
    (University of Liège, CREPP; Boulevard du Rectorat, 7 Bâtiment 31, boîte 39, 4000 Liège, Belgium)

  • Ferdinand Vieider

    ()
    (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, and DIW, Berlin, Germany)

  • Marie-Claire Villeval

    ()
    (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, IZA, Bonn, Germany, and CCP, Aarhus, Denmark)

Abstract

The ratio bias -according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small numbers- has recently gained momentum, with researchers especially in health economics emphasizing the policy importance of the phenomenon. Although the bias has been replicated several times, some doubts remain about its economic significance. Our two experiments show that the bias disappears once order effects are excluded, and once salient and dominant incentives are provided. This holds true for both choice and valuation tasks. Also, adding context to the decision problem does not change this outcome. No ratio bias could be found in between-subject tests either, which leads us to the conclusion that the policy relevance of the phenomenon is doubtful at best.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: ftp://ftp.gate.cnrs.fr/RePEc/2009/0925.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0925.

as in new window
Length: 38 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:gat:wpaper:0925

Contact details of provider:
Postal: 93, chemin des Mouilles - B.P.167 69131 - Ecully cedex
Phone: 33(0)472 29 30 89
Fax: 33(0)47229 30 90
Web page: http://www.gate.cnrs.fr/
More information through EDIRC

Related research

Keywords: ratio bias; financial incentives; error rates; experiment;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Gerlinde Fellner & Matthias Sutter, 2008. "Causes, consequences, and cures of myopic loss aversion - An experimental investigation," Jena Economic Research Papers 2008-004, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  3. Budescu, David V, 1999. "Commentary on "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 43-45, December.
  4. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  5. Sawyer, Alan G, 1975. " Demand Artifacts in Laboratory Experiments in Consumer Research," Journal of Consumer Research, University of Chicago Press, vol. 1(4), pages 20-30, March.
  6. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. " Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
  7. 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.
  8. Mohammed Abdellaoui & Han Bleichrodt & Olivier L’Haridon, 2008. "A tractable method to measure utility and loss aversion under prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 245-266, June.
  9. Carissa Bonner & Ben R. Newell, 2008. "How to make a risk seem riskier: The ratio bias versus construal level theory," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 3, pages 411-416, June.
  10. Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Booij, Adam S. & van Praag, Bernard M. S. & van de Kuilen, Gijs, 2009. "A Parametric Analysis of Prospect Theory's Functionals for the General Population," IZA Discussion Papers 4117, Institute for the Study of Labor (IZA).
  12. Glenn W. Harrison & Morten I. Lau & Melonie B. Williams, 2002. "Estimating Individual Discount Rates in Denmark: A Field Experiment," American Economic Review, American Economic Association, vol. 92(5), pages 1606-1617, December.
  13. Robin P. Cubitt & Alistair Munro & Chris Starmer, 2004. "Testing explanations of preference reversal," Economic Journal, Royal Economic Society, vol. 114(497), pages 709-726, 07.
  14. Ulrich Schmidt & Horst Zank, 2005. "What is Loss Aversion?," Journal of Risk and Uncertainty, Springer, vol. 30(2), pages 157-167, January.
  15. Jinkwon Lee, 2008. "The effect of the background risk in a simple chance improving decision model," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 19-41, February.
  16. Bohm, Peter, 1994. "Time Preference and Preference Reversal among Experienced Subjects: The Effects of Real Payments," Economic Journal, Royal Economic Society, vol. 104(427), pages 1370-78, November.
  17. Tversky, Amos & Thaler, Richard H, 1990. "Anomalies: Preference Reversals," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 201-11, Spring.
  18. Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
  19. Eckel, Catherine, 1999. "Commentary on "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 47-48, December.
  20. Jose-Luis Pinto-Prades & Jorge-Eduardo Martinez-Perez & Jose-Maria Abellan-Perpinan, 2006. "The influence of the ratio bias phenomenon on the elicitation of health states utilities," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 1, pages 118-133, November.
  21. Wilcox, Nathaniel T, 1993. "Lottery Choice: Incentives, Complexity and Decision Time," Economic Journal, Royal Economic Society, vol. 103(421), pages 1397-1417, November.
  22. Mohammed Abdellaoui & Aurelien Baillon & Laetitia Placido & Peter P. Wakker, 2011. "The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation," American Economic Review, American Economic Association, vol. 101(2), pages 695-723, April.
  23. Huck, Steffen & Weizsacker, Georg, 1999. "Risk, complexity, and deviations from expected-value maximization: Results of a lottery choice experiment," Journal of Economic Psychology, Elsevier, vol. 20(6), pages 699-715, December.
  24. Hogarth, Robin M & Kunreuther, Howard, 1989. " Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
  25. Myagkov, Mikhail & Plott, Charles R, 1997. "Exchange Economies and Loss Exposure: Experiments Exploring Prospect Theory and Competitive Equilibria in Market Environments," American Economic Review, American Economic Association, vol. 87(5), pages 801-28, December.
  26. Trautmann, S.T. & Vieider, F.M. & Wakker, P.P., 2008. "Causes of ambiguity aversion: Known versus unknown preferences," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3160951, Tilburg University.
  27. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  28. Horst Zank, 2010. "On probabilities and loss aversion," Theory and Decision, Springer, vol. 68(3), pages 243-261, March.
  29. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
  30. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
  31. John Hey & Jinkwon Lee, 2005. "Do Subjects Separate (or Are They Sophisticated)?," Experimental Economics, Springer, vol. 8(3), pages 233-265, September.
  32. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  33. 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.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Mathieu Lefebvre & Ferdinand Vieider & Marie-Claire Villeval, 2009. "Incentive Effects on Risk Attitude in Small Probability Prospects," Post-Print halshs-00435957, HAL.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:gat:wpaper:0925. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nelly Wirth).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.