Adrian Bruhin () (Socioeconomic Institute, University of ZurichAuthor-Name: Helga Fehr, Institute of Economic Research, Swiss Federal Institute of Technology Zurich) Thomas Epper () (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)
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It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture regression model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two distinct types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from rational probability weighting consistent with prospect theory. 20% of the subjects weight probabilities linearly and behave essentially as expected value maximizers. Moreover, the individuals are assigned to one of these two groups with probabilities of close to one resulting in a low measure of entropy. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.
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Paper provided by University of Zurich, Socioeconomic Institute in its series Working Papers with number
0705.
Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
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Daniel Halbheer & Ernst Fehr & Lorenz Goette & Armin Schmutzler, 2007.
"Self-Reinforcing Market Dominance,"
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0711, University of Zurich, Socioeconomic Institute.
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Daniel Halbheer & Ernst Fehr & Lorenz Goette & Armin Schmutzler, .
"Self-Reinforcing Market Dominance,"
Working Papers
0094, University of Zurich, Institute for Strategy and Business Economics (ISU).
[Downloadable!]
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