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Measuring risk aversion with lists: a new bias

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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.

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Authors and Affiliations

  1. Department of Economics and Business, Universitat Pompeu Fabra and Barcelona GSE, Ramon Trias Fargas 25, 08005, Barcelona, Spain

    Antoni Bosch-Domènech

  2. Department of Economics, University of California, Davis, CA, 95616, USA

    Joaquim Silvestre

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  1. Antoni Bosch-Domènech
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  2. Joaquim Silvestre
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Correspondence to Antoni Bosch-Domènech.

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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

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