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Abstract: Abstract Measuring risk tolerance is of interest to policymakers given its importance in decision-making, and previous research has shown that the scale of payoffs influences elicited risk aversion levels. Sometimes budget-conscious researchers pay only some subjects for their decisions when eliciting risk preferences, or pay smaller stakes to everyone. We test the effect of paying some versus paying all subjects in the context of risk preferences, controlling for the difference in stakes induced by paying only some subjects. Paying some subjects yields lower levels of risk aversion than paying everyone, but more risk aversion than paying all subjects lower stakes. Paying some subjects also impacts the ordering of subjects by elicited risk aversion. We estimate a simple structural model of latent risk aversion that derives a correction factor to approximate paying high stakes to all subjects. Paying some subjects high stakes meaningfully impacts the elicited level of risk aversion, but better approximates the condition of paying all subjects high stakes compared to paying everyone lower stakes. PubDate: 2023-04-01
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Abstract: Abstract Incentivized experiments in which individuals receive monetary rewards according to the outcomes of their decisions are regarded as the gold standard for preference elicitation in experimental economics. These task-related real payments are considered necessary to reveal subjects’ “true preferences.” Using a systematic, large-sample approach with three subject pools of private investors, professional investors, and students, we test the effect of task-related monetary incentives on risk preferences in four standard experimental tasks. We find no significant differences in behavior between and within subjects in the incentivized and non-incentivized regimes. We discuss implications for academic research and forions in the field. PubDate: 2023-04-01
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Abstract: Abstract Public lotteries for non-market goods provide a unique field counterpart to experimental lotteries with monetary payoffs for investigating risk and time preferences. In this paper random expected utility and rank dependent expected utility models of public lottery choice are estimated under constant relative risk aversion preferences and hyperbolic time preferences with a balanced panel of 7,924 participants in the 127 lotteries for elk hunting licenses in New Mexico in the year before and after a set of natural policy experiments. Consistent with experimental findings, significant heterogeneity in risk and time preferences is found in applicant choices, and applicants are found to significantly place a nonlinear weight on both the probability of being drawn and of harvesting an elk. Mean discount rate estimates are also on a par with experimental results documented in the growing joint risk-time preferences literature. PubDate: 2023-03-04
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Abstract: Abstract Data from three surveys before and after the 2022 mass shootings in Buffalo and Uvalde provide a natural experiment to assess perceptions and valuations of mass shootings. The degree of overestimation of mass shooting risks surged following these tragedies. The odds of believing that mass shooting risks exceeded other firearm homicide risks more than doubled after these shootings. More than one-third of respondents viewed mass shootings as a greater threat to themselves than other firearm homicide risks, and a similar number viewed them as a greater threat to the public. A risk–risk choice experiment examined the tradeoff rate between deaths from mass shootings and from other firearm homicides. People generally viewed prevention of deaths from mass shootings as being equivalent to preventing other firearm homicides. However, respondents who believed that mass shooting risks were a greater threat both to themselves and to the public than other firearm homicide risks treated mass shooting deaths prevented as if they were 37.5% greater than the stated amounts. Risk–risk tradeoff studies and stated preference studies more generally should account for whether respondents’ perceived risk levels differ from the risk values stated in the survey. The principal manifestation of dread for mass shootings is through risk beliefs. Irrational fears may intrude on elicitation of risk preferences, making it essential to account for perceptional biases in stated preference studies of risks. PubDate: 2023-02-25
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Abstract: Abstract In the United States, individual states established a minimum legal sale age (MLSA) for e-cigarettes between 2010 and 2016 when a federal MLSA came into place. These policies provide a natural experiment from which we can better understand the effect that e-cigarettes have on youth combustible tobacco use. This paper uses National Youth Tobacco Survey data to estimate the effect of the gradual roll-out of e-cigarette MLSAs in the United States on youth e-cigarette use, cigarette use, and cigar use (i.e., cigars, cigarillos, or little cigars). Using an estimator designed to correct for dynamic heterogeneity in treatment effects, e-cigarette MLSAs are estimated to reduce lifetime e-cigarette use by approximately 25% and increase daily cigarette use and daily cigar use by approximately 35%. Therefore, these MLSAs operate as intended in reducing e-cigarette use, although at the expense of more dangerous combustible tobacco use. The Food and Drug Administration should consider the impact of e-cigarette availability in reducing youth combustible tobacco use as an important public health benefit of e-cigarettes in their regulatory activity. PubDate: 2023-01-14 DOI: 10.1007/s11166-022-09402-y
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Abstract: Abstract Gender differences in risk attitudes have recently been shown to be context-dependent rather than ubiquitous. We manipulate three widely used risk elicitation tasks to test whether the presence of a safe option among the set of alternatives can explain the heterogeneity of the findings. We find that the availability of a safe option induces significant effects in two out of three tasks. Despite the well-known instability of elicited risk preferences, we show with a structural model that the effect on risk attitudes is rather stable across tasks, but not sufficiently strong to reach traditional significance levels. PubDate: 2023-01-14 DOI: 10.1007/s11166-022-09400-0
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Abstract: Abstract We experimentally study a class of pie-sharing games with alternating roles from a decision-making perspective. For this, we consider a variant of a two-stage alternating-offer game which introduces an imbalance in the protagonists’ bargaining powers. This game class enables us to investigate how exposure to risk and strategic ambiguity affects one’s bargaining behaviour. Two structural econometric models of behaviour, a naïve and a sophisticated one, capture remarkably well the observed deviations from the game-theoretic benchmark. Our findings indicate, in particular, that a higher exposure to strategic ambiguity leads to a behaviour that is less responsive to the game’s parameters and to distorted, yet consistent, beliefs about other’s behaviour. We also find evidence of a backward-reasoning whereby first-stage decisions relate to the second-stage ones but which do not call for the counterfactual reasoning that characterises rationality in such settings. PubDate: 2023-01-07 DOI: 10.1007/s11166-022-09401-z
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Abstract: Abstract The value of a change in mortality risk is conventionally described by the marginal rate of substitution between income and mortality risk–the value per statistical life (VSL). The income elasticity of VSL is important for estimating how the value of mortality risk varies with time (for evaluating programs with long-lived effects) and across populations with different income levels (for evaluating programs with international consequences). Previous estimates of income elasticity based on meta-analysis of wage-differential studies and cross-sectional comparisons in stated-preference studies suggest values between about one-half and one. We present new estimates based on a 16-year series of wage-differential estimates in Taiwan. Between 1982 and 1997, estimated VSL increased by a factor of five while household labor earnings increased by 60 percent, per capita GDP increased two-and-a-half fold, and the occupational fatality rate in manufacturing and service industries decreased by half. Comparing the growth of VSL with that of household income implies the income elasticity is between about two and five, but this estimate may be biased by the endogeneity of VSL, which is affected by workers’ job choices. Using a two-stage approach to control for endogeneity yields estimates of the income elasticity of VSL between two-thirds and one, consistent with estimates from other approaches. PubDate: 2023-01-07 DOI: 10.1007/s11166-022-09397-6
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Abstract: Abstract It has been a longstanding goal of the behavioral sciences to measure and model people’s risk preferences. In this article, we adopt a novel theoretical perspective of doing so and test to what extent specific types of individuals share similar risk profiles (i.e., configurations of multidimensional risk preferences). To this end, we analyzed data of a U.S. sample (N = 3,123) in a comprehensive and rigorous way, resulting in a twofold contribution. First, based on data from the Domain-Specific Risk-Taking scale (DOSPERT) and using a cross-validation procedure, we established a multidimensional trait space including general and domain-specific dimensions of risk preference. Second, we employed model-based cluster analyses in this multidimensional trait space, finding that 66% of participants can be described well with four basic risk profiles. In sum, the typological perspective proposed in this article has important implications for current theories of risk preference and the measurement of individual differences therein. PubDate: 2022-12-22 DOI: 10.1007/s11166-022-09398-5
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Abstract: Abstract How do we judge others’ behavior when they are both seen and not seen—when we observe their behavior but not the underlying traits or history that moderate the perceived riskiness of their behavior' We investigate this question in the context of the COVID-19 pandemic: How people make sense of, and judge, vaccination-contingent behaviors—behaviors, such as going to the gym or a bar, which are considered to be more or less risky and appropriate, depending on the target’s vaccination status. While decision theoretic models suggest that these judgments should depend on the probability that the target is vaccinated (e.g., the positivity of judgments should increase linearly with the probability of vaccination), in a large-scale pre-registered experiment (N = 936) we find that both riskiness and appropriateness judgments deviate substantially from such normative benchmarks. Specifically, when participants judge a stranger’s behavior, without being asked to think about the stranger’s vaccination status, they tend to judge these behaviors similarly positively to behaviors of others who are known to be fully vaccinated. By contrast, when participants are explicitly prompted to think about the vaccination status of others, they do so, leading them to view others more disparagingly, at times even more negatively than what a normative benchmark would imply. More broadly, these results suggest new directions for research on how people respond to risk and ambiguity. We demonstrate that even subtle cues can fundamentally alter what information is “top of mind,” that is, what information is included or excluded when making judgments. PubDate: 2022-12-12 DOI: 10.1007/s11166-022-09396-7
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Abstract: Abstract The illusion of control occurs when individuals believe that exerting objectively meaningless control over pure chance events increases their probability of success. In economics, the illusion of control has only ever been studied in choice under risk, where probability distributions are known, and has been found to have no effect. This contrasts with studies in psychology, which have found a persistent positive effect. The cause of these conflicting findings may be that the illusion of control only affects risk taking in choice under ambiguity, where probability distributions are fully or partially unknown. To address this gap in the literature, we conducted an incentive compatible laboratory experiment which induced the illusion of control in some participants. We find that the illusion of control does not affect choice under risk but increases ambiguity tolerance. These results bridge the gap between the psychology and economics literature, emphasizing the importance of distinguishing risk from ambiguity. Our results suggest that some studies may unintentionally induce an illusion of control and over-estimate ambiguity tolerance. PubDate: 2022-12-06 DOI: 10.1007/s11166-022-09399-4
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Abstract: Abstract The Description-Experience gap (DE gap) is widely thought of as a tendency for people to act as if overweighting rare events when information about those events is derived from descriptions but as if underweighting rare events when they experience them through a sampling process. While there is now clear evidence that some form of DE gap exists, its causes, exact nature, and implications for decision theory remain unclear. We present a new experiment which examines in a unified design four distinct causal mechanisms that might drive the DE gap, attributing it respectively to information differences (sampling bias), to a feature of preferences (ambiguity sensitivity), or to aspects of cognition (likelihood representation and memory). Using a model-free approach, we elicit a DE gap similar in direction and size to the literature’s average and find that when each factor is considered in isolation, sampling bias stemming from under-represented rare events is the only significant driver of the gap. Yet, model-mediated analysis reveals the possibility of a smaller DE gap, existing even without information differences. Moreover, this form of analysis of our data indicates that even when information about them is obtained by sampling, rare events are generally overweighted. PubDate: 2022-10-25 DOI: 10.1007/s11166-022-09393-w
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Abstract: Abstract The literature suggests that probability weighting and choice set dependence influence risky choices. However, their relative importance remains an open question. We present a joint test that uses binary choices between lotteries provoking Common Consequence and Common Ratio Allais Paradoxes and manipulates their joint payoff distribution. We show non-parametrically that probability weighting and choice set dependence both play a role at describing aggregate choices. To parsimoniously account for heterogeneity, we also estimate a structural model using a finite mixture approach. The model uncovers substantial heterogeneity and classifies subjects into three types: 38% Prospect Theory types whose choices are predominantly driven by probability weighting, 34% Salience Theory types whose choices are predominantly driven by choice set dependence, and 28% Expected Utility Theory types. The model predicts type-specific differences in the frequency of preference reversals out-of-sample, i.e., in choices with a different context than the ones used for estimating the model. Moreover, the out-of-sample predictions indicate that the choice context shapes the influence of choice set dependence. PubDate: 2022-10-15 DOI: 10.1007/s11166-022-09392-x
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Abstract: Abstract In a series of experiments, we provide evidence that people pay special attention to the probability of losing. We first analyze this behavior in the typically used one-shot choice tasks. We then extend our analysis to repeated decisions in choice tasks, as well as allocation and investment tasks. Additionally, we test both decision making under risk and under gradually removed uncertainty, as with decisions from experience. Our findings of explicit attention to loss probabilities contradict the predictions of normative and descriptive decision theories, such as Expected Utility Theory and (Cumulative) Prospect Theory. We suggest a value function with a jump rather than a kink at the reference point, which separates gains and losses. PubDate: 2022-10-06 DOI: 10.1007/s11166-022-09391-y
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Abstract: Abstract We experimentally characterize and measure the interaction between risk and time preferences. Our results indicate that risk and time preferences are intertwined. We find that decision makers are insensitive to time delay for small probabilities of gains, but become progressively more sensitive to time delay as the probability of gain increases. We compare the fit of existing decision models that capture risk and time preferences. Our results indicate that the models which allow for probability-time interaction and capture magnitude effect fit the data better. We also show that accounting for risk-time preferences interaction leads to lower estimated discount rates. PubDate: 2022-10-06 DOI: 10.1007/s11166-022-09394-9
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Abstract: Abstract Time discounting is a fundamental characteristic of human decision-making. In general, the literature finds that individuals with lower discount rates are more likely to exhibit healthy behaviors such as saving for the future, exercising, acquiring more education and making other decisions that have long-term benefits. Recent evidence suggests there may be at least two pathways by which individual’s underlying behavioral discount rate may be realized: non-linearities in the intertemporal utility function (standard discounting behavior) and non-linearities in the perception of time. We conducted an experiment on Amazon Mechanical Turk (N = 1000) to evaluate whether discount rates could be modified through an educational intervention. In the experiment, the treatment group had to calculate rates of return for a six-month period for a series of investment vehicles with varying rates of returns including a savings account, a bank certificate of deposit, government bond, mutual fund, and mutual sector fund. The results indicate that even one week after treatment, the intervention group’s discount rates were significantly lower than the control group’s discount rates. This has important implications for the possibility of designing interventions to lower individual discount rates. PubDate: 2022-08-27 DOI: 10.1007/s11166-022-09390-z
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Abstract: Abstract This paper empirically analyzes how individual characteristics are associated with risk aversion, loss aversion, time discounting, and present bias. To this end, we conduct a large-scale demographically representative survey across eight European countries. We elicit preferences using incentivized multiple price lists and jointly estimate preference parameters to account for their structural dependencies. Our findings suggest that preferences are linked to a variety of individual characteristics such as age, gender, and income as well as some personal values. We also report evidence on the relationship between cognitive ability and preferences. Incentivization, stake size, and the order of presentation of binary choices matter, underlining the importance of controlling for these factors when eliciting economic preferences. PubDate: 2022-08-16 DOI: 10.1007/s11166-022-09383-y
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Abstract: Abstract When receiving personalized rather than population-based information, agents improve their knowledge about their probability of experiencing adverse events (e.g. health shocks). Being revealed as high or low risk, they may revise their willingness to pay (WTP) for prevention programs. If the WTP changes of the high- and low-risk individuals go in opposite directions, the overall impact on the WTP for prevention depends on whether the relationship between WTP and the initial probability of damage is convex or concave. We address this question in a laboratory experiment. Participants received an endowment and were exposed to a non-financial damage—consisting in electrical shocks—with a certain probability. We elicit subjects’ WTP for self-protection and self-insurance, i.e. actions reducing respectively the probability and the number of shocks, using the Becker-DeGroot-Marschak mechanism. Our results suggest that WTP for self-protection is insensitive to the baseline probability to undergo pain, but reveal that WTP for self-insurance increases at a decreasing rate with this probability. This implies that the diffusion of personalized information should reduce the demand for self-insurance programs. PubDate: 2022-07-26 DOI: 10.1007/s11166-022-09384-x
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Abstract: Abstract We study the formation of biased expectations across domains and examine whether they have a unique influence on health and financial behaviors. Combining individual-level longitudinal, retrospective, and end of life data from several European countries for more than a decade, we estimate the time-varying individual level bias in ‘survival expectations' (BSE) and compare it to a similar type of bias in the formation of ‘meteorological expectations' (BME). We exploit the variation across individual's family history (parental age at death) to evaluate the causal effect of BSE on health and financial behaviors, and we compare it to the effect of BME. This allows to investigate whether the BSE effect is due to private information, or another mechanism. We find that BSE increases the likelihood of engaging in less risky health and financial behaviors. We estimate that a one standard deviation increase in BSE reduces the average individual probability of smoking by 48% (and increase the probability of holding retirement accounts by 69%). In contrast, BME has little effect on healthy behaviors, and is only associated with a change in some financial behaviors. PubDate: 2022-07-25 DOI: 10.1007/s11166-022-09382-z
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Abstract: Abstract Expected Utility Theory (EUT) provides axioms for maximizing utility in risky choice. The Independence Axiom (IA) is its most demanding axiom: preferences between two options should not change when altering both options equally by mixing them with a common gamble. We tested common consequence (CC) and common ratio (CR) violations of the IA over several months in thousands of stochastic choices using a large variety of binary option sets. Three monkeys showed consistently few outright Preference Reversals (8%) but substantial graded Preference Changes (46%) between the initial preferred gamble and the corresponding altered gamble. Linear Discriminant Analysis (LDA) indicated that gamble probabilities predicted most Preference Changes in CC (72%) and CR (88%) tests. The Akaike Information Criterion indicated that probability weighting within Cumulative Prospect Theory (CPT) explained choices better than models using Expected Value (EV) or EUT. Fitting by utility and probability weighting functions of CPT resulted in nonlinear and non-parallel indifference curves (IC) in the Marschak-Machina triangle and suggested IA non-compliance of models using EV or EUT. Indeed, CPT models predicted Preference Changes better than EV and EUT models. Indifference points in out-of-sample tests were closer to CPT-estimated ICs than EV and EUT ICs. Finally, while the few outright Preference Reversals may reflect the long experience of our monkeys, their more graded Preference Changes corresponded to those reported for humans. In benefitting from the wide testing possibilities in monkeys, our stringent axiomatic tests contribute critical information about risky decision-making and serves as basis for investigating neuronal decision mechanisms. PubDate: 2022-07-22 DOI: 10.1007/s11166-022-09388-7
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