Abstract
Some experimental participants are averse to compound lotteries: they prefer simple lotteries that depend on only one random event, even when the simple lotteries offer lower expected value. This paper proposes that many behavioral “investments” represent more compound risk for poorer people—who often face multiple dimensions of deprivation—than for richer people. As a result, identical aversion to compound lotteries can prevent investment among poorer people, but have no effect on richer people. The paper reports five studies: two initial studies that document that aversion to compound lotteries operates as an economic preference, two “laboratory experiments in the field” in El Salvador, and one Internet survey experiment in India. Poorer Salvadoran women who choose a compound lottery are 27 percentage points more likely to have found formal employment than those who chose a simple lottery, but lottery choice is unrelated to employment for richer women. Poorer students at the national Salvadoran university choose more compound lotteries than richer students, on average, implying that aversion to compound lotteries screened out poorer aspirants but not richer ones. Poorer and lower-caste Indian participants who choose compound lotteries are more likely than those who choose simple lotteries to have a different occupation than their parents, which is not the case for better-off participants. These findings suggest that the consequences of aversion to compound lotteries are different in the context of poverty and disadvantage.
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Notes
Henrich et al. (2010) offer a recent review of many such behavioral studies (although their purpose is to demonstrate that scope remains for many more). The papers most similar to this one shed light on poverty by demonstrating a correlation between experimental behavior and economic heterogeneity. For example, in experiments in Colombia, Cardenas (2003) finds that groups with participants that are more heterogeneous in real wealth are less able to manage common resources in the lab. Tanaka et al. (2010) show that richer villagers in Vietnam behave more patiently and less risk aversely in lab experiments. In trust games with punishment, Hoff et al. (2011) report that low caste people in rural India are less likely to punish violations of trust.
For example, Akay et al. (2011) find comparable levels of ambiguity aversion among Ethiopian farmers and Dutch university students. Engle Warnick et al. (2011) find that ambiguity averse Peruvian farmers are less likely to diversify their main crop into multiple varieties than other farmers. Similarly, Ross et al. (2010) show that ambiguity averse farmers in Laos are less likely to grow a new form of rice.
Results and statistical significance are unchanged using OLS (interaction=0.448 percentage points, standard error=0.168), which makes fewer assumptions but is less suitable for probabilities near 1.
Because of migration, the estimate of this interaction would be a lower bound on the true effect. If migration between these sites is random, it will introduce noise into the geographic measure of poverty and attenuate the results. If migration is selective—such that people who invest and succeed move from the poor location to the rich location—then this would increase the concentration of those willing to invest in the rich pool at the expense of the poor pool, reducing the interaction. In fact, migration is unlikely to have had a quantitatively important impact on these results, but either way the true effect would be even stronger, if different at all, from that estimated here. I thank an anonymous reviewer for making this point.
If participants discount probabilities by some weighting fraction mapping from objective to subjective probabilities such as Prospect Theory’s, then even if a compound lottery is objectively more likely to be won than a simple lottery, the weighted probability of winning the simple lottery could be greater than the product of the weighted probabilities of winning each step in the compound lottery, depending on the shape of the weighting function. This would lead the decision-maker to choose the simple lottery, but would not represent an aversion to compound risk.
28 percent of the participants were still students at the time of the survey, presumably in university or graduate school. However, in India college students are not as free to change majors as in the U.S., and many would already have a fixed occupational category. In any event, the regression results below are very similar, almost numerically identical, if the sample is restricted to non-students.
It is also the case that choosing the simple lottery is positively associated with having a different job than one’s parents among richer participants, although the theory makes no prediction about this. This could be a spurious result of having, by this stage in the paper, estimated many regressions.
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Acknowledgements
I thank Gabriela Escobar for excellent field research assistance, and Roberto Mena, the Instituto de Investigaciones Económicas, and the Universidad de El Salvador for their kind support and for hosting the experiments. I appreciate comments from Anne Case, Diane Coffey, John Darley, Faruk Gul, Karla Hoff, John Papp, Wolfgang Pesendorfer, Sam Schulhofer-Wohl, Eldar Shafir, Brandon Stichka, Abby Sussman, and two anonymous referees. All errors are my own.
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Spears, D. Poverty and probability: aspiration and aversion to compound lotteries in El Salvador and India. Exp Econ 16, 263–284 (2013). https://doi.org/10.1007/s10683-012-9333-9
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DOI: https://doi.org/10.1007/s10683-012-9333-9
Keywords
- Poverty
- Reduction of compound lotteries
- Compound risk
- Employment
- El Salvador
- India
- Lab experiments in the field