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Risk aversion and embedding bias

In Selten (1967) “Strategy Method,” the second mover in the game submits a complete strategy. This basic idea has been exported to nonstrategic experiments, where a participant reports a complete list of contingent decisions, one for each situation or state in a given sequence, out of which one and only one state, randomly selected, will be implemented. In general, the method raises the following concern. If S0 and S1 are two different sequences of states, and state s is in both S0 and S1, would the participant make the same decision in state s when confronted with S0 as when confronted with S1? If not, the experimental results are suspect of suffering from an “embedding bias.” We check for embedding biases in elicitation methods of Charles Holt and Susan Laury (Laury and Holt, 2000, and Holt and Laury, 2002), and of the present authors (Bosch-Domènech and Silvestre, 1999, 2002, 2006a, b) by appropriately chosen replications of the original experiments. We find no evidence of embedding bias in our work. But in Holt and Laury’s method participants tend to switch earlier to the riskier option when later pairs of lotteries are eliminated from the sequence, suggesting the presence of some embedding bias.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 934.

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Date of creation: Jan 2006
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Handle: RePEc:upf:upfgen:934
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Antoni Bosch-Domènech & Joaquim Silvestre, 2003. "Do the eealthy risk more money? An experimental comparison," Economics Working Papers 692, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005.
  2. 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.
  3. Jordi Brandts & Gary Charness, 1998. "Hot vs. cold: Sequential responses and preference stability in experimental games," Economics Working Papers 321, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Antoni Bosch-Domènech & Joaquim Silvestre, 2002. "Reflections on gains and losses: A 2x2x7 experiment," Economics Working Papers 640, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2005.
  5. Steffen Andersen & Glenn Harrison & Morten Lau & E. Rutström, 2009. "Elicitation using multiple price list formats," Experimental Economics, Springer, vol. 12(3), pages 365-366, September.
  6. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstr�m, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
  7. Schotter, Andrew & Weigelt, Keith & Wilson, Charles, 1990. "A Laboratory Investigation Of Multi-Person Rationality And Presentation Effects," Working Papers 90-24, C.V. Starr Center for Applied Economics, New York University.
  8. Antoni Bosch-Domènech & Joaquim Silvestre, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Working Papers 361, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1999.
  9. Guth, Werner & Huck, Steffen & Muller, Wieland, 2001. "The Relevance of Equal Splits in Ultimatum Games," Games and Economic Behavior, Elsevier, vol. 37(1), pages 161-169, October.
  10. John Hey & Jinkwon Lee, 2005. "Do Subjects Separate (or Are They Sophisticated)?," Experimental Economics, Springer, vol. 8(3), pages 233-265, September.
  11. Bosch-Domènech, Antoni & Silvestre, Joaquim, 2010. "Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman," Economics Letters, Elsevier, vol. 107(2), pages 180-182, May.
  12. Steffen Anderson & Glenn Harrison & Morten Lau & Rutstrom Elisabet, 2007. "Valuation using multiple price list formats," Applied Economics, Taylor & Francis Journals, vol. 39(6), pages 675-682.
  13. Mitzkewitz,Michael & Nagel,Rosemarie, . "Envy,greed and anticipation in ultimatum games with incomplete information: An experimental study," Discussion Paper Serie B :181, University of Bonn, Germany.
  14. Susan K. Laury & Charles A. Holt, 2005. "Further Reflections on Prospect Theory," Experimental Economics Center Working Paper Series 2006-23, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  15. Timothy N. Cason & Vai-Lam Mui, 1998. "Social Influence in the Sequential Dictator Game," Monash Economics Working Papers archive-37, Monash University, Department of Economics.
  16. Oxoby, Robert J. & McLeish, Kendra N., 2004. "Sequential decision and strategy vector methods in ultimatum bargaining: evidence on the strength of other-regarding behavior," Economics Letters, Elsevier, vol. 84(3), pages 399-405, September.
  17. Jeannette Brosig & Joachim Weimann & Chun-Lei Yang, 2003. "The Hot Versus Cold Effect in a Simple Bargaining Experiment," Experimental Economics, Springer, vol. 6(1), pages 75-90, June.
  18. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
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