Implementing and Testing Risk Preference Induction Mechanisms in Experimental Sealed Bid Auctions
Risk preference inducing lottery procedures can serve as valuable tools for experimental economists. However, questioning their effectiveness, experimenters may avoid them even when predictions and conclusions depend crucially on risk preferences. Here, I review risk preference induction attempts in sealed bid auctions, discussing factors that promote or hinder success. Making the procedure very transparent and having subjects learn about it in simple environments promote success. Hysteresis resulting from switching between monetary payoffs and lottery procedures in one environment hinder success. Thus, lottery procedures appear sensitive to the implementation. However, implemented carefully, they can generate behavior consistent with the intended preferences.
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- Joyce E. Berg & Lane A. Daley & John W. Dickhaut & John R. O'Brien, 1986. "Controlling Preferences for Lotteries on Units of Experimental Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 281-306.
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- Cox, James C & Smith, Vernon L & Walker, James M, 1992. "Theory and Misbehavior of First-Price Auctions: Comment," American Economic Review, American Economic Association, vol. 82(5), pages 1392-412, December.
- Walker, James M & Smith, Vernon L & Cox, James C, 1990. "Inducing Risk-Neutral Preferences: An Examination in a Controlled Market Environment," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 5-24, March.
- Powell, James L., 1984. "Least absolute deviations estimation for the censored regression model," Journal of Econometrics, Elsevier, vol. 25(3), pages 303-325, July.
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