, Volume 7, Issue 2, pp 199-213

Implementing and testing risk-preference-induction mechanisms in experimental sealed-bid auctions

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Abstract

Risk-preference-inducing lottery procedures can serve as valuable tools for experimental economists. However, questioning their effectiveness, experimenters may avoid them even when predictions and conclusions depend crucially on risk preferences. Here, I review risk-preference-induction attempts in sealed-bid auctions, discussing factors that promote or hinder success. Making the procedure very transparent and having subjects learn about it in simple environments promote success. Hysteresis resulting from switching between monetary payoffs and lottery procedures in one environment hinders success. Thus, lottery procedures appear sensitive to the implementation. However, implemented carefully, they can generate behavior consistent with the intended preferences.

I thank James Cox, Vernon Smith, and James Walker for their data. An appendix giving all the estimates referred to in the text is available from the author on request.