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Measuring Risk Aversion Model-Independently

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Author Info

  • Maier, Johannes
  • Rüger, Maximilian

Abstract

We propose a new method to elicit individuals' risk preferences. Similar to Holt and Laury (2002), we use a simple multiple price-list format. However, our method is based on a general notion of increasing risk, which allows classifying individuals as more or less risk-averse without assuming a specic utility framework. In a laboratory experiment we compare both methods. Each classies individuals almost identically as risk-averse, -neutral, or -seeking. However, classications of individuals as more or less risk-averse dier substantially. Moreover, our approach yields higher measures of risk aversion, and only with our method these measures are robust toward increasing stakes.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 11873.

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Date of creation: 11 Oct 2010
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Handle: RePEc:lmu:muenec:11873

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Related research

Keywords: Risk Aversion; Multiple Price-List; Elicitation; Laboratory Experiment; Holt and Laury Method; Mean Preserving Spreads; Non-EUT; Increasing Risk;

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References

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  1. U Schmidt & H Zank, 2002. "Risk Aversion in Cumulative Prospect Theory," The School of Economics Discussion Paper Series 0207, Economics, The University of Manchester.
  2. 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.
  3. Laurent E. Calvet & Paolo Sodini, 2010. "Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios," NBER Working Papers 15859, National Bureau of Economic Research, Inc.
  4. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  5. Steffen Andersen & Glenn Harrison & Morten Lau & E. Rutström, 2009. "Elicitation using multiple price list formats," Experimental Economics, Springer, vol. 12(3), pages 365-366, September.
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  8. David Bruner & Michael McKee & Rudy Santore, 2008. "Hand in the Cookie Jar: An Experimental Investigation of Equity-based Compensation and Managerial Fraud," Working Papers 08-05, Department of Economics, Appalachian State University.
  9. Raj Chetty, 2003. "A New Method of Estimating Risk Aversion," NBER Working Papers 9988, National Bureau of Economic Research, Inc.
  10. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
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  12. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  13. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
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  15. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
  16. Catherine C. Eckel & Philip J. Grossman, 2008. "Forecasting Risk Attitudes: An Experimental Study Using Actual and Forecast Gamble Choices," Development Research Unit Working Paper Series archive-01, Monash University, Department of Economics.
  17. Markus K. Brunnermeier & Stefan Nagel, 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals," American Economic Review, American Economic Association, vol. 98(3), pages 713-36, June.
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Cited by:
  1. Alison L. Booth & Lina Cardona-Sosa & Patrick Nolen, 2013. "Gender Differences in Risk Aversion: Do Single-Sex Environments Affect their Development?," Borradores de Economia 786, Banco de la Republica de Colombia.

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