Risk aversion elicitation: reconciling tractability and bias minimization
Risk attitude is known to be a key determinant of various economic and financial choices. Behavioral studies that aim to evaluate the role of risk attitudes in contexts of this type, therefore, require tools for measuring individual risk tolerance. Recent developments in decision theory provide such tools. However, the methods available can be time consuming. As a result, some practitioners might have an incentive to prefer "fast and frugal" methods to clean but more costly methods. In this article, we focus on a tractable procedure initially proposed by Holt and Laury (2002) to elicit risk attitude. We generalize this method to measure utility and risk aversion as follows. First, we allow measurement of probabilistic risk attitude through violations of expected utility due to probability weighting. Second, we use the outcome scale rather than the probability scale in the menu of choices. Third, we compare sure payoffs with lotteries instead of comparing non-degenerate lotteries. A within-subject experimental study illustrates the gains in tractability and bias minimization that can result from such an extension.
(This abstract was borrowed from another version of this item.)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Han Bleichrodt & José María Abellán-Perpiñan & JoséLuis Pinto & Ildefonso Méndez-Martínez, 2005.
"Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility,"
Economics Working Papers
798, Department of Economics and Business, Universitat Pompeu Fabra.
- Han Bleichrodt & Jose Maria Abellan-Perpiñan & Jose Luis Pinto-Prades & Ildefonso Mendez-Martinez, 2007. "Resolving Inconsistencies in Utility Measurement Under Risk: Tests of Generalizations of Expected Utility," Management Science, INFORMS, vol. 53(3), pages 469-482, March.
- Han Bleichrodt & Jose María Abellán Perpiñán & Jose Luis Pinto-Prades & Ildefonso Méndez-Martínez, 2006. "Resolving Inconsistencies in Utility Measurement under Risk: Tests of Generalizations of Expected Utility," Working Papers 06.19, Universidad Pablo de Olavide, Department of Economics.
- Charles Noussair & Ping Wu, 2006. "Risk tolerance in the present and the future: an experimental study," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 401-412.
- Diecidue, E. & Wakker, P.P., 2000.
"On the Intuition of Rank-Dependent Utility,"
2000-74, Tilburg University, Center for Economic Research.
- Steffen Andersen & Glenn Harrison & Morten Lau & E. Rutström, 2009.
"Elicitation using multiple price list formats,"
Springer, vol. 12(3), pages 365-366, September.
- Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-96, March.
- H. Bleichrodt & C. Paraschiv & Mohammed Abdellaoui, 2007.
"Loss Aversion Under Prospect Theory: A Parameter-Free Measurement,"
- Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
- Abdellaoui, Mohammed & Barrios, Carolina & Wakker, Peter P., 2007. "Reconciling introspective utility with revealed preference: Experimental arguments based on prospect theory," Journal of Econometrics, Elsevier, vol. 138(1), pages 356-378, May.
- Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
- Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
- Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, 05.
- Charles Towe & Glenn Harrison & John List, 2004.
"Naturally occurring preferences and exogenous laboratory experiments: A case study of risk aversion,"
Framed Field Experiments
00155, The Field Experiments Website.
- Glenn W Harrison & John A List & Charles Towe, 2007. "Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion," Econometrica, Econometric Society, vol. 75(2), pages 433-458, 03.
- Baillon, Aurélien & Driesen, Bram & Wakker, Peter P., 2012. "Relative concave utility for risk and ambiguity," Games and Economic Behavior, Elsevier, vol. 75(2), pages 481-489.
- Mohammed Abdellaoui & Han Bleichrodt & Olivier L’Haridon, 2008. "A tractable method to measure utility and loss aversion under prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 245-266, June.
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Renate Schubert, 1999. "Financial Decision-Making: Are Women Really More Risk-Averse?," American Economic Review, American Economic Association, vol. 89(2), pages 381-385, May.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Carbone, Enrica & Hey, John D, 2000. "Which Error Story Is Best?," Journal of Risk and Uncertainty, Springer, vol. 20(2), pages 161-76, March.
- Jayson L. Lusk & Keith H. Coble, 2005. "Risk Perceptions, Risk Preference, and Acceptance of Risky Food," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(2), pages 393-405.
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
- Ido Erev & Ira Glozman & Ralph Hertwig, 2008. "What impacts the impact of rare events," Journal of Risk and Uncertainty, Springer, vol. 36(2), pages 153-177, April.
- John C. Hershey & Paul J. H. Schoemaker, 1985. "Probability Versus Certainty Equivalence Methods in Utility Measurement: Are they Equivalent?," Management Science, INFORMS, vol. 31(10), pages 1213-1231, October.
- Cohen, Michele & Jaffray, Jean-Yves & Said, Tanios, 1987. "Experimental comparison of individual behavior under risk and under uncertainty for gains and for losses," Organizational Behavior and Human Decision Processes, Elsevier, vol. 39(1), pages 1-22, February.
- Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
- 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.
- Mark McCord & Richard de Neufville, 1986. ""Lottery Equivalents": Reduction of the Certainty Effect Problem in Utility Assessment," Management Science, INFORMS, vol. 32(1), pages 56-60, January.
- Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Risk aversion and embedding bias," Economics Working Papers 934, Department of Economics and Business, Universitat Pompeu Fabra.
- 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.
- Peter Wakker & Daniel Deneffe, 1996. "Eliciting von Neumann-Morgenstern Utilities When Probabilities Are Distorted or Unknown," Management Science, INFORMS, vol. 42(8), pages 1131-1150, August.
- Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
When requesting a correction, please mention this item's handle: RePEc:kap:theord:v:71:y:2011:i:1:p:63-80. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.