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Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion

  • Glenn W Harrison
  • John A List
  • Charles Towe

Does individual behavior in a laboratory setting provide a reliable indicator of behavior in a naturally occurring setting? We consider this general methodological question in the context of eliciting risk attitudes. The controls that are typically employed in laboratory settings, such as the use of abstract lotteries, could lead subjects to employ behavioral rules that differ from the ones they employ in the field. Because it is field behavior that we are interested in understanding, those controls might be a confound in themselves if they result in differences in behavior. We find that the use of artificial monetary prizes provides a reliable measure of risk attitudes when the natural counterpart outcome has minimal uncertainty, but that it can provide an unreliable measure when the natural counterpart outcome has background risk. Behavior tended to be moderately risk averse when artificial monetary prizes were used or when there was minimal uncertainty in the natural nonmonetary outcome, but subjects drawn from the same population were much more risk averse when their attitudes were elicited using the natural nonmonetary outcome that had some background risk. These results are consistent with conventional expected utility theory for the effects of background risk on attitudes to risk. Copyright The Econometric Society 2007.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 75 (2007)
Issue (Month): 2 (03)
Pages: 433-458

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Handle: RePEc:ecm:emetrp:v:75:y:2007:i:2:p:433-458
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