An Experimental Study of Risk Aversion in Decision-making Under Uncertainty

Abstract

This paper presents the findings of an experimental study of risk aversion in decision making under uncertainty. When presented with a series of gambles, subjects determined the certainty-equivalent wealth of each gamble. Risk aversion was measured by the Markowitz risk premium of the decision. The fixed effects regression model indicates the significant influence of the first three moments of a probability distribution in determining the risk premium. These results lend support to the rules of mean-variance and third-degree stochastic dominance. The extent of influence is also affected by the individual’s age, but not by gender, wealth or schooling.