Abstract
Eliciting the level of risk aversion of experimental subjects is of crucial concern to experimenters. In the literature there are a variety of methods used for such elicitation; the concern of the experiment reported in this paper is to compare them. The methods we investigate are the following: Holt–Laury price lists; pairwise choices, the Becker–DeGroot–Marschak method; allocation questions. Clearly their relative efficiency in measuring risk aversion depends upon the numbers of questions asked; but the method itself may well influence the estimated risk-aversion. While it is impossible to determine a ‘best’ method (as the truth is unknown) we can look at the differences between the different methods. We carried out an experiment in four parts, corresponding to the four different methods, with 96 subjects. In analysing the data our methodology involves fitting preference functionals; we use four, Expected Utility and Rank-Dependent Expected Utility, each combined with either a CRRA or a CARA utility function. Our results show that the inferred level of risk aversion is more sensitive to the elicitation method than to the assumed-true preference functional. Experimenters should worry most about context.
Highlights
Risk attitude is a crucial factor influencing economic behaviour
Our results show that the inferred level of risk aversion is more sensitive to the elicitation method than to the assumed-true preference functional
Crosetto and Filippin (2016) include something interesting when they write: ‘‘We show by means of a simulation exercise that part of the often observed heterogeneity of estimates across tasks is due to task-specific measurement error induced by the mere mechanics of the tasks.’’ This, we suspect, is due to the way that the data from the different methods is analysed—using just one task to elicit an estimate of risk-aversion
Summary
Experimenters are interested in eliciting the risk-attitude of their subjects This can be done in two ways: either directly, using the context of a particular experiment to estimate the risk-aversion that best explains behaviour; or indirectly, eliciting risk aversion in a separate part of the experiment, and using the elicited value to explain behaviour in the main experiment. Economic theory posits that decisions under risk depend on how people evaluate, and decide between, risky lotteries By these we mean lotteries where the outcomes are risky, and where the probabilities are known. In the literature there are a number of proposed preference functionals, the best-known of which is the Expected Utility functional All of these embody the idea of an underlying utility function u(.); it is the degree of concavity of this when it is defined over money that indicates the degree of risk-aversion.
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