Abstract
Various experimental procedures aimed at measuring individual risk aversion involve a list of pairs of alternative prospects. We first study the widely used method by Holt and Laury (Am Econ Rev 92(5):1644–1655, 2002), for which we find that the removal of some items from the lists yields a systematic decrease in risk aversion and scrambles the ranking of individuals by risk aversion. This bias, that we call embedding bias, is quite distinct from other confounds that have been previously observed in the use of the HL method. It may be related to empirical phenomena and theoretical developments where better prospects increase risk aversion. Nevertheless, we also find that the more recent elicitation method due to Abdellaoui et al. (Theory Decis 71:63–80, 2011), also based on lists but using only one and the same probability in the list, does not display any statistically significant bias when the corresponding items of the list are removed. Our results suggest that methods other than the popular HL one may be preferable for the measurement of risk aversion.
Similar content being viewed by others
References
Abdellaoui M., Driouchi A., L’Haridon O. (2011) Risk aversion elicitation: reconciling tractability and bias minimization. Theory and Decision 71: 63–80
Amaldoss W., Bettman J. R., Payne J. W. (2008) Biased but efficient: an investigation of coordination facilitated by asymmetric dominance. Marketing Science 27: 903–921
Andersen S., Harrison G. W., Lau M. I., Elisabet E. E. (2006) Elicitation using multiple price list formats. Experimental Economics 9(4): 383–405
Bateman I., Day B., Loomes G., Sugden R. (2007) Can ranking techniques elicit robust values?. Journal of Risk and Uncertainty 34: 49–66
Beauchamp, J. P., Benjamin, D. J., Chabris, C. F., & Laibson, D. I. (2012). How malleable are risk preferences and loss aversion? WP.
Bosch-Domènech A., Silvestre J. (1999) Does risk aversion or attraction depend on income? An experiment. Economics Letters 65: 265–273
Bosch-Domènech, A., & Silvestre, J. (2006a). Do the wealthy risk more money? An experimental comparison. In C. Schultz & K. Vind (Eds.), Institutions, equilibria and efficiency: essays in honor of Birgit Grodal (pp. 95–106). Berlin: Springer.
Bosch-Domènech A., Silvestre J. (2006b) Reflections on gains and losses: a 2x2x7 experiment. Journal of Risk and Uncertainty 33(3): 217–235
Bosch-Domènech, A., & Silvestre, J. (2006c). The gain-loss asymmetry and single-self preferences. In S. Kusmoka & A. Yamasaki (Eds.), Advances in mathematical economics. Berlin: Springer
Bosch-Domènech A., Silvestre J. (2010) Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman. Economics Letters 107(2): 180–182
Bruhin A., Fehr-Duda H., Epper T. (2010) Risk and rationality: uncovering heterogeneity in probability distortion. Econometrica 78(4): 1375–1412
Dave C., Eckel C. C., Johnson C. A., Rojas C. (2010) Eliciting risk preferences: when is simple better?. Journal of Risk and Uncertainty 41: 219–243
Drichoutis, A., & Lusk, J. (2012). Risk preference elicitation without the confounding effect of probability weighting. MPRA Paper No. 37776.
Farquhar P.H. (1984) Utility assessment methods. Management Science 30: 1283–1300
Fehr-Duda H., Bruhin A., Epper T. (2010) Rationality on the rise: why relative risk aversion increases with stake size. Journal of Risk and Uncertainty 40: 147–180
Fehr-Duda, H., & Epper, T. (2012). Probability and risk: foundations and economic implications of probability-dependent risk preferences. Annual Review of Economics, 4, 19.1–19.27.
Harrison G. W., Johnson E., McInnes M. M., Rutstrom E. E. (2005) Risk aversion and incentive effects: Comment. American Economic Review 95(3): 897–901
Hershey J.C., Kunreuther H.C., Schoemaker P.J.H. (1982) Sources of bias in assessment procedures for utility functions. Management Science 28: 936–954
Hershey J.C., Schoemaker P.J.H. (1985) Probability versus certainty equivalence methods in utility measurement: Are they equivalent?”. Management Science 31: 1213–1231
Holt C. A. (1986) Preference reversals and the independence axiom. American Economic Review 76(3): 508–515
Holt C. A., Laury S. K. (2002) Risk aversion and incentive effects in lottery choices. American Economic Review 92(5): 1644–1655
Holt C. A., Laury S. K. (2005) Risk aversion and incentive effects: new data without order effects. American Economic Review 95(3): 902–912
Huber J., Payne J., Puto C. (1982) Adding asymmetrically dominated alternatives. Violations of Regularity and the Similarity Hypothesis”. Journal of Consumer Research 9: 90–98
Isaac M., James D. (2000) Just who are you calling risk averse?. Journal of Risk and Uncertainty 20(2): 177–187
Lévy-Garboua L., Maafi H., Masclet D., Terracol A. (2012) Risk aversion and framing effects. Experimental Economics 15: 128–144
Machina M. J. (1982) Expected utility’ analysis without the independence axiom. Econometrica 50(2): 227–323
Machina, M. J. (1983). Generalized expected utility analysis and the nature of observed violations of the independence axiom. In B. Stigum & F. Wenstop (Eds.), Foundations of utility and risk theory with applications, Dordrecht: D. Reidel.
Mas-Colell A., Whinston M., Green J. (1995) Microeconomic theory. Oxford University Press, Oxford
McCord M., de Neufville R. (1986) Lottery equivalents: reduction of the certainty effect problem in utility assessment. Management Science 32: 56–61
Parducci A., Weddell D. H. (1986) The category effect with rating scales: number of categories, number of stimuli and method of presentation. Journal of Experimental Psychology: Human Perception and Performance 12(4): 496–516
Robinson A., Jones-Lee M. W., Loomes G. (2001) Visual analog scales, standard gambles and relative risk aversion. Medical Decision Making 21: 17–27
Saha A. (1993) Expo-power utility: a flexible form for absolute and relative risk aversion. American Journal of Agricultural Economics 75(4): 905–913
Stewart N., Brown G. D. A., Carter N. (2005) Absolute identification by relative judgment. Psychological Review 112(4): 881–911
Wakker P. (2010) Prospect theory. Cambridge University Press, Cambridge UK
Wakker P., Deneffe D. (1996) Eliciting von Neumann-Morgenstern utilities when probabilities are distorted or unknown. Management Science 42: 1131–1150
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Bosch-Domènech, A., Silvestre, J. Measuring risk aversion with lists: a new bias. Theory Decis 75, 465–496 (2013). https://doi.org/10.1007/s11238-012-9332-5
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11238-012-9332-5