Abstract
With the rise of experimental research in the social sciences, numerous methods to elicit and classify people’s risk attitudes in the laboratory have evolved. However, evidence suggests that people’s attitudes towards risk may change considerably when measured with different methods. Based on a within-subject experimental design using four widespread risk preference elicitation methods, we find that different procedures indeed give rise to considerably varying estimates of individual and aggregate level risk preferences. Conducting simulation exercises to obtain benchmarks for subjects’ behavior, we find that the observed heterogeneity in risk preference estimates across methods looks qualitatively similar to the heterogeneity arising from independent random draws from choices in the experimental tasks, despite significantly positive correlations between tasks. Our study, however, provides evidence that subjects are surprisingly well aware of the variation in the riskiness of their choices. We argue that this calls into question the common interpretation of variation in revealed risk preferences as being inconsistent.
Highlights
Risk is an integral part of many economic decisions and, has been considered a key building block of economic theory (Arrow 1965)
In experimental economics and psychology, irrespective of differences in their approaches, incentivized risk preference elicitation tasks have evolved as widely accepted tools to measure and assess individuallevel attitudes towards risk
Conducting simulation exercises to obtain benchmarks for participants’ behavior, we find that the observed heterogeneity of revealed risk preference across methods is qualitatively similar to the heterogeneity arising from independent random draws from choices in the experimental tasks
Summary
Risk is an integral part of many economic decisions and, has been considered a key building block of economic theory (Arrow 1965). While economists and psychologists have developed a variety of competing methodologies, a consensus on which of the elicitation procedures gives rise to the most accurate estimates of individual-level risk preferences has not been reached yet (Charness et al 2013). Facing this pluralism of methods, pragmatism prevails among researchers when choosing among various competing risk preference elicitation tasks. Experimental evidence, reviewed in detail, suggests that participants’ attitudes towards risk may vary considerably when measured with different elicitation methods—a finding recently referred to as the “risk elicitation puzzle” (Pedroni et al 2017)
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