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How Serious is the Measurement-Error Problem in a Popular Risk-Aversion Task?

Author

Listed:
  • Fabien Perez

    () (ENSAE - Ecole Nationale de la Statistique et de l'Analyse Economique - Ecole Nationale de la Statistique et de l'Analyse Economique)

  • Guillaume Hollard

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Radu Vranceanu

    () (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)

  • Delphine Dubart

    (ESSEC Business School - Essec Business School)

Abstract

This paper uses the test/retest data from the Holt and Laury (2002) experiment to provide estimates of the measurement error in this popular risk-aversion task. Maximum likelihood estimation suggests that the variance of the measurement error is approximately equal to the variance of the number of safe choices. Simulations confirm that the coefficient on the risk measure in univariate OLS regressions is approximately half of its true value. Unlike measurement error, the discrete transformation of continuous riskaversion is not a major issue. We discuss the merits of a number of different solutions: increasing the number of observations, IV and the ORIV method developed by Gillen et al. (2019).

Suggested Citation

  • Fabien Perez & Guillaume Hollard & Radu Vranceanu & Delphine Dubart, 2019. "How Serious is the Measurement-Error Problem in a Popular Risk-Aversion Task?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02291224, HAL.
  • Handle: RePEc:hal:cesptp:hal-02291224
    Note: View the original document on HAL open archive server: https://hal-essec.archives-ouvertes.fr/hal-02291224
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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. repec:ucp:jpolec:doi:10.1086/701681 is not listed on IDEAS
    3. Giuseppe Attanasi & Nikolaos Georgantzís & Valentina Rotondi & Daria Vigani, 2018. "Lottery- and survey-based risk attitudes linked through a multichoice elicitation task," Theory and Decision, Springer, vol. 84(3), pages 341-372, May.
    4. Paolo Crosetto & Antonio Filippin, 2016. "A theoretical and experimental appraisal of four risk elicitation methods," Experimental Economics, Springer;Economic Science Association, vol. 19(3), pages 613-641, September.
    5. repec:eee:jeborg:v:160:y:2019:i:c:p:138-157 is not listed on IDEAS
    6. Arnaud Reynaud & Stéphane Couture, 2012. "Stability of risk preference measures: results from a field experiment on French farmers," Theory and Decision, Springer, vol. 73(2), pages 203-221, August.
    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.
    8. Gary Charness & Thomas Garcia & Theo Offerman & Marie Villeval, 2019. "Do measures of risk attitude in the laboratory predict behavior under risk in and outside of the laboratory?," Working Papers halshs-02146618, HAL.
    9. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    10. repec:aea:jecper:v:32:y:2018:i:2:p:91-114 is not listed on IDEAS
    11. Chuang, Yating & Schechter, Laura, 2015. "Stability of experimental and survey measures of risk, time, and social preferences: A review and some new results," Journal of Development Economics, Elsevier, vol. 117(C), pages 151-170.
    12. repec:aea:jecper:v:32:y:2018:i:2:p:155-72 is not listed on IDEAS
    13. Sarah Jacobson & Ragan Petrie, 2009. "Learning from mistakes: What do inconsistent choices over risk tell us?," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 143-158, April.
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    More about this item

    Keywords

    ORIV; Experiments; Measurement error; Risk-aversion; Test/retest;

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