Christian Rieck

Inferring risk attitudes from certainty equivalents: Some lessons from an experimental study

This paper investigates experimentally whether certainty equivalents (CE) can be useful indicators for an individuals risk attitude. It is found that the reliability of this indicator (i.e. of a CE elicited by a Vickrey auction) is rather low. The possibility that the Vickrey auction mechanism causes considerable distortions can be ruled out, but noise in observing ones CE may explain the low degree of reliability in the data. This casts doubt on the usefulness of CE indices for the measurement of individual risk attitudes.

Designing an Experimental Stock Market

Trading mechanisms on asset markets and their impact on the pricing and allocation of securities have always constituted focal points for scholars of financial economics. Standard theories such as the Capital Asset Pricing Model rely on specific assumptions concerning the functioning of the market mechanism and the behavior of market participants. The market mechanism is usually assumed to function in textbook fashion. Transaction costs and frictions, or incentives, inherent in the institutional design of the market are assumed away.