Susan K. Laury

Risk Aversion and Incentive Effects: New Data without Order Effects

Holt and Laury (2002) used a menu of ordered lottery choices to make inferences about risk aversion under various payment conditions. The main results of that paper were: (a) subjects are risk averse, even for relatively small payments of less than

Pay One or Pay All: Random Selection of One Choice for Payment

5; (b) risk aversion increases sharply with large increases in the scale of cash payoffs; and (c) there is no significant effect from increasing the scale of hypothetical payment. With a few exceptions noted in the paper, all treatments began with a low-payment choice, followed by a choice with hypothetical payments that had been scaled up (by 20 , 50 , or 90 ), followed by a real-cash decision with the same high payment scale (20 , 50 , or 90 ), followed by a single, final, low (1 ) real payment choice. Those in the 90 treatment could earn amounts ranging from

Comparing Small-Group and Individual Behavior in Lottery-Choice Experiments

9.00 to

Anonymity and the voluntary provision of public goods

346.50 in this task. As Glenn W. Harrison et al. (2004) correctly note, this design confounds order and treatment effects since the high real payment choice was always completed after the low real and high hypothetical payment tasks. In a new experiment reported below, we first seek to replicate Harrison et al.’s finding that the order effect (participating in a low-payment choice before making a high-payment choice) magnifies the scale effect. In a second treatment, each subject completes the menu of lottery choices under just one payment condition (1 or 20 , real or hypothetical), thereby eliminating any order effects. I. New Data

Induced-value tests of the referendum voting mechanism

It has become increasingly common in economics experiments to elicit a series of choices from participants, and then pay for only one, selected at random, after all have been made. This allows the researcher to observe a large number of individual decisions, and to increase payoffs for each decision since only one of them will be used for payment. It has not been demonstrated, however, whether subjects behave as if each of these choices involves the stated payoffs, or if subjects scale-down payoffs to account for the random selection that is made. This paper reports an experiment that tests this directly. In an environment where payoff scale effects have been demonstrated to matter, three treatments are conducted: pay for one of 10 choices under low payoffs, pay for all 10 choices under low payoffs, and pay for 1 of 10 choices under 10x the low payoff level. Increasing payoff scale has a significant effect on choices compared with the low payoff treatments where all 10 decisions are paid, or where one decision is paid. However, there is no significant difference in choices between paying for one or all 10 decisions at the low payoff level. This supports the validity of using the random-choice payment method.

The Impact of Insurance Prices on Decision-Making Biases: An Experimental Analysis

Lottery-choice experiments are conducted to compare risk preferences revealed by three-person groups versus isolated individuals. A lottery-choice experiment consists of a menu of paired lottery choices structured so that the crossover point from a low-risk to a high-risk lottery can be used to infer the degree of risk aversion. A between-subjects experiment of group versus individual lottery-choice decisions reveal that there is not a significant difference in the average crossover point, but lottery choices are affected by a significant interaction between subject composition (individual or group) and lottery winning percentage. Also, a three-phased individual-group-individual sequenced experiment reveals that the count of safe lotteries chosen by groups is, on average, significantly greater than the mean of the individual members. Finally, making a phase-two group decision has a significant impact on subsequent phase-three individual decisions relative to the initial phase-one (individual) decisions.

Chapter 4 – Assessment and Estimation of Risk Preferences

Abstract Experimental research investigating the voluntary provision of a pure public good has shown that participants consistently allocate a portion of their resources to this good when the full-information noncooperative game theoretic (Nash) prediction is to allocate zero resources to this good. This paper considers whether the discrepancy between empirical results and the Nash prediction is due to a lack of anonymity. We report a sequence of public goods experiments in which participants do not know the identity of other group members and the experimenter cannot associate any participants decisions with that persons identity. The results indicate that these procedures do not alter the tendency for token allocations to differ from the Nash prediction.

Further reflections on the reflection effect

Abstract An induced-value laboratory experiment is conducted testing the incentive compatibility of the referendum voting mechanism for eliciting willingness to pay for public goods. Although errors were observed at the individual level, aggregate results suggest incentive compatibility in both hypothetical and real referenda.

Incentives in Public Goods Experiments: Implications for the Environment

This article tests whether the use of endogenous risk categorization by insurers enables consumers to make better-informed decisions even if they do not choose to purchase insurance. We do so by adding a simple insurance market to an experimental test of optimal (Bayesian) updating. In some sessions, no insurance is offered. In others, actuarially fair insurance prices are posted, and a subset of subjects is allowed to purchase this insurance. We find significant differences in the decision rules used depending on whether one observes insurance prices. Although the majority of choices correspond to Bayesian updating, the incidence of optimal decisions is higher in sessions with an insurance option. Most subjects given the option to purchase actuarially fair insurance choose to do so. However, fewer subjects purchase insurance when the probability of a loss is higher.

Voluntary contributions to a multiple threshold public good

Abstract This chapter surveys the rapidly growing literature in which risk preferences are measured and manipulated in laboratory and field experiments. The most commonly used measurement instruments are: an investment task for allocations between a safe and risky asset, a choice menu task for eliciting probability indifference points, and a pricing task for eliciting certainty equivalents of a lottery. These methods are compared in a manner that will help the practitioner decide which one to use, and how to deal with methodological issues associated with incentives, stakes, and the structure of choice menus. Applications involve using inferred risk preferences to document demographic effects, e.g. gender, and to explain the effects of risk aversion on observed behavior in economic in settings, e.g. bargaining, auctions, and contests. Some suggestions for evaluating the separate effects of utility curvature and probability weighting are provided.