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Incentive Effects on Risk Attitude in Small Probability Prospects

  • Mathieu Lefebvre

    ()

    (University of Liège, CREPP; Boulevard du Rectorat, 7 Bâtiment 31, boîte 39, 4000 Liège, Belgium)

  • Ferdinand Vieider

    ()

    (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, and DIW, Berlin, Germany)

  • Marie-Claire Villeval

    ()

    (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, IZA, Bonn, Germany, and CCP, Aarhus, Denmark)

Most studies on the role of incentives on risk attitude report data obtained from within-subject experimental investigations. This may however raise an issue of sequentiality of effects as later choices may be influenced by earlier ones. This paper reports instead between-subject results on the effect of monetary stakes on risk attitudes for small probability prospects in a laboratory experiment. Under low stakes, we find the typical risk seeking behavior for small probabilities predicted by the prospect theory. But under high stakes, we provide some evidence that risk seeking behavior is dramatically reduced. This could suggest that utility is not consistently concave over the outcome space, but rather contains a convex section for very small amounts.

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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0926.

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Length: 15 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:gat:wpaper:0926
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  1. Kachelmeier, Steven J & Shehata, Mohamed, 1992. "Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China," American Economic Review, American Economic Association, vol. 82(5), pages 1120-41, December.
  2. Mathieu Lefebvre & Ferdinand Vieider & Marie-Claire Villeval, 2009. "The Ratio Bias Phenomenon : Fact or Artifact ?," Working Papers 0925, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Martin G. Kocher & Peter Martinsson & Martine Visser, 2006. "Does Stake Size matter for Cooperation and Punishment?," Tinbergen Institute Discussion Papers 06-104/1, Tinbergen Institute.
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  8. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
  9. 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.
  10. Bosch-Domenech, Antoni & Silvestre, Joaquim, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Letters, Elsevier, vol. 65(3), pages 265-273, December.
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  13. Hans Binswanger, 1980. "Attitudes toward risk: Experimental measurement in rural india," Artefactual Field Experiments 00009, The Field Experiments Website.
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