Measuring Risk Aversion in a Name-Your-Own-Price Channel

Abstract

This paper measures the risk aversion coefficients exhibited by online customers at a name-your-own-price (NYOP) intermediary that allowed the submission of subsequent offers. We present a decision analytic model to determine the optimal sequence of offers for a decision maker with a constant risk aversion coefficient. We show how the optimal sequence of offers can be determined by simple sensitivity analysis. We then discuss the inverse problem of estimating the risk aversion coefficient from a sequence of offers placed by a customer. We provide a direct expression for the risk aversion coefficient in terms of the increments between each two successive offers. This expression separates the estimation of the risk aversion from the remaining model parameters and enables its calculation directly by observing a sequence of offers from a customer. We then use field data from an NYOP firm to estimate the risk aversion that is exhibited throughout the online process. We find that customers exhibit relatively high risk aversion coefficients on Internet sites. Based on three different product groups, we also find that risk aversion is a significant variable in the offer strategy of the customers. To our knowledge, this is the first work that empirically examines risk aversion in a nonexperimental Internet-based NYOP setting.