Collective Risk Preferences in Small Groups: A Structural Estimation Approach

Abstract

In this study, we investigate the changes in risk attitudes and risk perceptions that occur while collective risk preferences are formed. Data on risk attitudes and risk perceptions were collected in lottery choice experiments. The subjects participated in individual choice tasks and group choice tasks. The observed choice data are analyzed by using a structural estimation approach. The behavioral models used for structural estimation are based on expected utility theory (EUT), prospect theory (PT) and model parameters. The superiority of the models is also examined. The results of the structural estimations show that 1) overall, the PT specifications are superior to the EUT specifications, 2) regardless of whether the participants are male or female, there are no significant disparities between the subjective and objective risks in the individual and group decisions, 3) risk attitudes become more risk-loving (and closer to risk neutral) during the process of forming collective risk preferences, 4) the switching phenomena that occur during Holt and Laury’s experiment with lottery pairs can be explained only by changes in risk attitudes, which are independent of the riskiness of lotteries, and 5) these results are obtained regardless of the majority or the unanimous agreement rules.