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Risk aversion and embedding bias

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Abstract

In Selten (1967) “Strategy Method,” the second mover in the game submits a complete strategy. This basic idea has been exported to nonstrategic experiments, where a participant reports a complete list of contingent decisions, one for each situation or state in a given sequence, out of which one and only one state, randomly selected, will be implemented. In general, the method raises the following concern. If S0 and S1 are two different sequences of states, and state s is in both S0 and S1, would the participant make the same decision in state s when confronted with S0 as when confronted with S1? If not, the experimental results are suspect of suffering from an “embedding bias.” We check for embedding biases in elicitation methods of Charles Holt and Susan Laury (Laury and Holt, 2000, and Holt and Laury, 2002), and of the present authors (Bosch-Domènech and Silvestre, 1999, 2002, 2006a, b) by appropriately chosen replications of the original experiments. We find no evidence of embedding bias in our work. But in Holt and Laury’s method participants tend to switch earlier to the riskier option when later pairs of lotteries are eliminated from the sequence, suggesting the presence of some embedding bias.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 934.

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Date of creation: Jan 2006
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Handle: RePEc:upf:upfgen:934

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Web page: http://www.econ.upf.edu/

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Keywords: Embedding bias; strategy method; Holt; Laury; Risk Attraction; Risk Aversion; Experiments; Leex;

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  1. Oxoby, Robert J. & McLeish, Kendra N., 2004. "Sequential decision and strategy vector methods in ultimatum bargaining: evidence on the strength of other-regarding behavior," Economics Letters, Elsevier, Elsevier, vol. 84(3), pages 399-405, September.
  2. Antoni Bosch-Domènech & Joaquim Silvestre, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 361, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1999.
  3. Antoni Bosch-Domènech & Joaquim Silvestre, 2003. "Do the eealthy risk more money? An experimental comparison," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 692, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005.
  4. Schotter Andrew & Weigelt Keith & Wilson Charles, 1994. "A Laboratory Investigation of Multiperson Rationality and Presentation Effects," Games and Economic Behavior, Elsevier, Elsevier, vol. 6(3), pages 445-468, May.
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  10. Bosch-Domènech, Antoni & Silvestre, Joaquim, 2010. "Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman," Economics Letters, Elsevier, Elsevier, vol. 107(2), pages 180-182, May.
  11. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstr�m, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 897-901, June.
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  14. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 902-912, June.
  15. Mitzkewitz,Michael & Nagel,Rosemarie, . "Envy,greed and anticipation in ultimatum games with incomplete information: An experimental study," Discussion Paper Serie B, University of Bonn, Germany :181, University of Bonn, Germany.
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Citations

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Cited by:
  1. Mohammed Abdellaoui & Ahmed Driouchi & Olivier L’Haridon, 2011. "Risk aversion elicitation: reconciling tractability and bias minimization," Theory and Decision, Springer, Springer, vol. 71(1), pages 63-80, July.
  2. Nicolas Jacquemet & Jean-Louis Rullière & Isabelle Vialle, 2008. "Monitoring optimistic agents," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00272928, HAL.
  3. Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Reflections on gains and losses: A 2 × 2 × 7 experiment," Journal of Risk and Uncertainty, Springer, Springer, vol. 33(3), pages 217-235, December.
  4. Aurora García-Gallego & Nikolaos Georgantzís & Ainhoa Jaramillo-Gutiérrez & Melanie Parravano, 2010. "The SGG risk elicitation task:Implementation and results," ThE Papers, Department of Economic Theory and Economic History of the University of Granada. 10/07, Department of Economic Theory and Economic History of the University of Granada..
  5. Jordi Brandts & Gary Charness, 2011. "The strategy versus the direct-response method: a first survey of experimental comparisons," Experimental Economics, Springer, Springer, vol. 14(3), pages 375-398, September.
  6. Aurora García-Gallego & Nikolaos Georgantzís & Ainhoa Jaramillo-Gutiérrez & Melanie Parravano, 2010. "The lottery-panel task for bi-dimensional parameter-free elicitation of risk attitudes," ThE Papers, Department of Economic Theory and Economic History of the University of Granada. 10/12, Department of Economic Theory and Economic History of the University of Granada..

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