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Incentive Effects on Risk Attitude in Small Probability Prospects

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Author Info

  • Lefèbvre, Mathieu

    ()
    (CREPP, Université de Liège)

  • Vieider, Ferdinand M.

    ()
    (CNRS, GATE)

  • Villeval, Marie Claire

    ()
    (CNRS, GATE)

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.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4545.

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Length: 16 pages
Date of creation: Nov 2009
Date of revision:
Publication status: published in: Economics Letters, 2010, 109 (2), 115-120
Handle: RePEc:iza:izadps:dp4545

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Keywords: decision; incentives; risk attitude; experiment;

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References

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  1. Mathieu Lefebvre & Ferdinand Vieider & Marie-Claire Villeval, 2011. "The Ratio Bias Phenomenon : Fact or Artifact ?," Post-Print halshs-00435956, HAL.
  2. Kocher, Martin G. & Martinsson, Peter & Visser, Martine, 2008. "Does stake size matter for cooperation and punishment?," Munich Reprints in Economics 18191, University of Munich, Department of Economics.
  3. Booij, Adam S. & van de Kuilen, Gijs, 2009. "A parameter-free analysis of the utility of money for the general population under prospect theory," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 651-666, August.
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  5. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
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  7. Johansson-Stenman, Olof & Mahmud, Minhaj & Martinsson, Peter, 2004. "Does stake size matter in trust games?," Working Papers in Economics 140, University of Gothenburg, Department of Economics.
  8. Bosch-Domenech, Antoni & Silvestre, Joaquim, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Letters, Elsevier, vol. 65(3), pages 265-273, December.
  9. Kachelmeier, Steven J & Shehata, Mohamed, 1992. "Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China," American Economic Review, American Economic Association, vol. 82(5), pages 1120-41, December.
  10. 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.
  11. 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.
  12. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  13. 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.
  14. 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.
  15. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
  16. 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.
  17. Kuhberger, Anton & Schulte-Mecklenbeck, Michael & Perner, Josef, 2002. "Framing decisions: Hypothetical and real," Organizational Behavior and Human Decision Processes, Elsevier, vol. 89(2), pages 1162-1175, November.
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Cited by:
  1. Vieider, Ferdinand M. & Lefebvre, Mathieu & Bouchouicha, Ranoua & Chmura, Thorsten & Hakimov, Rustamdjan & Krawczyk, Michal & Martinsson, Peter, 2013. "Common components of risk and uncertainty attitudes across contexts and domains: Evidence from 30 countries," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-402, Social Science Research Center Berlin (WZB).
  2. 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.
  3. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2012. "Responsibility effects in decision making under risk," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2012-402, Social Science Research Center Berlin (WZB).
  4. 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.
  5. 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, Social Science Research Center Berlin (WZB).
  6. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2010. "Responsibility Effects in Decision Making under Risk," Discussion Papers in Economics 12115, University of Munich, Department of Economics.

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