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Changing the probability versus changing the reward

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Abstract

There are two means of changing the expected value of a risk: changing the probability of a reward or changing the reward. Theoretically, the former produces a greater change in expected utility for risk averse agents. This paper uses two formats of a risk preference elicitation mechanism under two decision frames to test this hypothesis. After controlling for decision error, probability weighting, and order effects, subjects, on average, are slightly risk averse and prefer an increase in the expected value of a risk due to increasing the probability over a compensated increase in the reward. There is substantial across-format inconsistency but very little within-format inconsistency at the individual level.

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Authors and Affiliations

  1. Department of Economics, Appalachian State University, 3111 Raley Hall, 416 Howard St., Boone, NC, 28608, USA

    David M. Bruner

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  1. David M. Bruner
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Correspondence to David M. Bruner.

Additional information

This research was undertaken at the University of Calgary Behavioural and Experimental Economics Laboratory (CBEEL). I would like to thank Christopher Auld, John Boyce, Glenn Harrison, Michael McKee, Bill Neilson, Rob Oxoby, Christian Vossler, Nat Wilcox, and two anonymous referees for their many helpful comments and suggestions. I would also like to thank participants at the 2007 North American Economic Science Association Meetings where an earlier version of this paper was presented.

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Bruner, D.M. Changing the probability versus changing the reward. Exp Econ 12, 367–385 (2009). https://doi.org/10.1007/s10683-009-9219-7

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  • DOI: https://doi.org/10.1007/s10683-009-9219-7

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