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Inducing Risk Neutral Preferences with Binary Lotteries: A Reconsideration

  • Glenn W. Harrison
  • Jimmy Martínez-Correa
  • J. Todd Swarthout

We evaluate the binary lottery procedure for inducing risk neutral behavior. We strip the experimental implementation down to bare bones, taking care to avoid any potentially confounding assumption about behavior having to be made. In particular, our evaluation does not rely on the assumed validity of any strategic equilibrium behavior, or even the customary independence axiom. We show that subjects sampled from our population are generally risk averse when lotteries are defined over monetary outcomes, and that the binary lottery procedure does indeed induce a statistically significant shift towards risk neutrality. This striking result generalizes to the case in which subjects make several lottery choices and one is selected for payment.

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Paper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2012-02.

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Length: 54
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:exc:wpaper:2012-02
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