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Complexity in risk elicitation may affect the conclusions: A demonstration using gender differences

Author

Listed:
  • Gary Charness

    () (University of California Santa Barbara)

  • Catherine Eckel

    () (Texas A&M University)

  • Uri Gneezy

    () (University of California San Diego
    University of Amsterdam)

  • Agne Kajackaite

    () (WZB Berlin Social Science Center)

Abstract

Abstract The Holt and Laury (American Economic Review, 92(5), 1644–1655, 2002) mechanism (HL) is the most widely-used method for eliciting risk preferences in economics. Participants typically make ten decisions with different variance options, with one of these choices randomly chosen for actual payoff. For this mechanism to provide an accurate measure of risk aversion, participants need to understand the choices and give consistent responses. Unfortunately, inconsistent and even dominated choices are often made. Can these mistakes lead to a misrepresentation of economic phenomena? We use gender differences in risk taking to test this question. In contrast to many findings in the literature, HL results typically do not find significant gender differences. We compare the HL approach, where we replicate the lack of significant gender differences, with a simpler presentation of the same choices in which participants make only one of the ten HL decisions; this simpler presentation yields strong gender differences indicating that women are more risk averse than men. We also find gender differences in the consistency of decisions. We believe that the results found in the simpler case are more reflective of underlying preferences, since the task is considerably easier to understand. Our results suggest that the complexity and structure of the risk elicitation mechanism can affect measured risk preferences. The issue of complexity and comprehension is also likely to be present with elicitation mechanisms in other realms of economic preferences.

Suggested Citation

  • Gary Charness & Catherine Eckel & Uri Gneezy & Agne Kajackaite, 2018. "Complexity in risk elicitation may affect the conclusions: A demonstration using gender differences," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 1-17, February.
  • Handle: RePEc:kap:jrisku:v:56:y:2018:i:1:d:10.1007_s11166-018-9274-6
    DOI: 10.1007/s11166-018-9274-6
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    References listed on IDEAS

    as
    1. John Hey & Andrea Morone & Ulrich Schmidt, 2009. "Noise and bias in eliciting preferences," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 213-235, December.
    2. Andersson, Ola & Tyran, Jean-Robert & Wengström, Erik & Holm, Håkan J., 2013. "Risk Aversion Relates to Cognitive Ability: Fact or Fiction?," Working Papers 2013:9, Lund University, Department of Economics, revised 21 Oct 2013.
    3. Uri Gneezy & Jan Potters, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 631-645.
    4. repec:now:jnlrbe:105.00000046 is not listed on IDEAS
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    7. 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.
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    9. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, March.
    10. Catherine C. Eckel & Philip J. Grossman, 2008. "Forecasting Risk Attitudes: An Experimental Study Using Actual and Forecast Gamble Choices," Monash Economics Working Papers archive-01, Monash University, Department of Economics.
    11. Charness, Gary & Gneezy, Uri & Imas, Alex, 2013. "Experimental methods: Eliciting risk preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 87(C), pages 43-51.
    12. Timothy N. Cason & Charles R. Plott, 2014. "Misconceptions and Game Form Recognition: Challenges to Theories of Revealed Preference and Framing," Journal of Political Economy, University of Chicago Press, vol. 122(6), pages 1235-1270.
    13. Rachel Croson & Uri Gneezy, 2009. "Gender Differences in Preferences," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 448-474, June.
    14. Chetan Dave & Catherine Eckel & Cathleen Johnson & Christian Rojas, 2010. "Eliciting risk preferences: When is simple better?," Journal of Risk and Uncertainty, Springer, vol. 41(3), pages 219-243, December.
    15. Charness, Gary & Gneezy, Uri, 2012. "Strong Evidence for Gender Differences in Risk Taking," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 50-58.
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