Abstract
Risk aversion experiments such as those by Holt and Laury (2002, 2005) measure risk aversion by examining subjects’ responses to a series of probability-ordered choices. Subjects are paid real money rewards, using the random round payment method in which the amount is determined by one randomly selected decision. The findings reported here were obtained from 119 subjects who confronted the same choice set and payment amounts, but 60 of these subjects were paid using the random-round method while the remaining 59 were paid based on an average of all their choices, the accumulated value method. The accumulated value payment method simulates portfolio returns, as opposed to returns from stand alone investments. Results indicate that accumulated value subjects took more risk and made more inconsistent decisions.
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Notes
The advantages of using a video game for behavioral experimentation are fully elaborated in Lawson and Lawson, 2009. The basic rationale concerns the importance of providing context for decision making in order to elicit natural behaviors. Video games accomplish this task with relative ease, compared to the typical laboratory setting, while at the same time preserving the advantages of the lab that are often lacking in field experiments, e.g., the ability to control and manipulate relevant variables and/or to replicate experiments.
Our experiments did not include a tenth decision pair, as our training sessions taught subjects how to play the game and, in the process, allowed us to screen for adequate understanding of the game.
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Lawson, L.L., Lawson, C.L. The Effect of Payment Methods on Risk Aversion. Atl Econ J 39, 249–260 (2011). https://doi.org/10.1007/s11293-011-9278-y
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DOI: https://doi.org/10.1007/s11293-011-9278-y