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Incentive Effects on Risk Attitude in Small Probability Prospects

Author

Listed:
  • Mathieu Lefebvre

    (CREPP - Center of Research in Public Economics and Population Economics - Université de Liège)

  • Ferdinand Vieider

    (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

  • Marie Claire Villeval

    (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

Abstract

Most studies on the role of incentives on risk attitude report data obtained from within-subject experimental investigations. This may however raise an issue of sequentiality of effects as later choices may be influenced by earlier ones. This paper reports instead between-subject results on the effect of monetary stakes on risk attitudes for small probability prospects in a laboratory experiment. Under low stakes, we find the typical risk seeking behavior for small probabilities predicted by the prospect theory. But under high stakes, we provide some evidence that risk seeking behavior is dramatically reduced. This could suggest that utility is not consistently concave over the outcome space, but rather contains a convex section for very small amounts.

Suggested Citation

  • Mathieu Lefebvre & Ferdinand Vieider & Marie Claire Villeval, 2010. "Incentive Effects on Risk Attitude in Small Probability Prospects," Post-Print halshs-00550469, HAL.
    • Handle: RePEc:hal:journl:halshs-00550469
    DOI: 10.1016/j.econlet.2010.09.002
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00550469
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    References listed on IDEAS

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    Cited by:

    1. Vieider, Ferdinand M., 2012. "Moderate stake variations for risk and uncertainty, gains and losses: Methodological implications for comparative studies," Economics Letters, Elsevier, vol. 117(3), pages 718-721.
    2. Asheem Shrestha & Jolanta Tamošaitienė & Igor Martek & M Reza Hosseini & David J Edwards, 2019. "A Principal-Agent Theory Perspective on PPP Risk Allocation," Sustainability, MDPI, vol. 11(22), pages 1-18, November.
    3. Ranoua Bouchouicha & Peter Martinsson & Haileselassie Medhin & Ferdinand M. Vieider, 2017. "Stake effects on ambiguity attitudes for gains and losses," Theory and Decision, Springer, vol. 83(1), pages 19-35, June.
    4. Julius Pahlke & Sebastian Strasser & Ferdinand Vieider, 2015. "Responsibility effects in decision making under risk," Journal of Risk and Uncertainty, Springer, vol. 51(2), pages 125-146, October.
    5. Ferdinand M. Vieider & Clara Villegas-Palacio & Peter Martinsson & Milagros Mejía, 2016. "Risk Taking For Oneself And Others: A Structural Model Approach," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 879-894, April.
    6. Isaiah Andrews & Drew Fudenberg & Lihua Lei & Annie Liang & Chaofeng Wu, 2022. "The Transfer Performance of Economic Models," Papers 2202.04796, arXiv.org, revised May 2023.
    7. Vieider, Ferdinand M. & Chmura, Thorsten & Martinsson, Peter, 2012. "Risk attitudes, development, and growth: Macroeconomic evidence from experiments in 30 countries," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2012-401, WZB Berlin Social Science Center.
    8. Vieider, Ferdinand M. & Cingl, Lubomír & Martinsson, Peter & Stojic, Hrvoje, 2013. "Separating attitudes towards money from attitudes towards probabilities: Stake effects and ambiguity as a test for prospect theory," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-401, WZB Berlin Social Science Center.
    9. Faravelli, Marco & Stanca, Luca, 2012. "Single versus multiple-prize all-pay auctions to finance public goods: An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 677-688.
    10. Ferdinand M. Vieider & Mathieu Lefebvre & Ranoua Bouchouicha & Thorsten Chmura & Rustamdjan Hakimov & Michal Krawczyk & Peter Martinsson, 2015. "Common Components Of Risk And Uncertainty Attitudes Across Contexts And Domains: Evidence From 30 Countries," Journal of the European Economic Association, European Economic Association, vol. 13(3), pages 421-452, June.
    11. Despoina Alempaki & Emina Canic & Timothy L. Mullett & William J. Skylark & Chris Starmer & Neil Stewart & Fabio Tufano, 2019. "Reexamining How Utility and Weighting Functions Get Their Shapes: A Quasi-Adversarial Collaboration Providing a New Interpretation," Management Science, INFORMS, vol. 65(10), pages 4841-4862, October.
    12. Schlüter, Maja & Baeza, Andres & Dressler, Gunnar & Frank, Karin & Groeneveld, Jürgen & Jager, Wander & Janssen, Marco A. & McAllister, Ryan R.J. & Müller, Birgit & Orach, Kirill & Schwarz, Nina & Wij, 2017. "A framework for mapping and comparing behavioural theories in models of social-ecological systems," Ecological Economics, Elsevier, vol. 131(C), pages 21-35.

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    More about this item

    Keywords

    Risk attitude; Incentives; Decision; Experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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