UCSD ECON 264 - Risk Aversion and Incentive Effects (3 pages)

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Risk Aversion and Incentive Effects



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Risk Aversion and Incentive Effects

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Lecture Notes


Pages:
3
School:
University of California, San Diego
Course:
Econ 264 - Experimental Economics
Experimental Economics Documents

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Risk Aversion and Incentive Effects New Data without Order Effects By CHARLES A HOLT AND Holt and Laury 2002 used a menu of ordered lottery choices to make inferences about risk aversion under various payment conditions The main results of that paper were a subjects are risk averse even for relatively small payments of less than 5 b risk aversion increases sharply with large increases in the scale of cash payoffs and c there is no significant effect from increasing the scale of hypothetical payment With a few exceptions noted in the paper all treatments began with a low payment choice followed by a choice with hypothetical payments that had been scaled up by 20 50 or 90 followed by a real cash decision with the same high payment scale 20 50 or 90 followed by a single final low 1 real payment choice Those in the 90 treatment could earn amounts ranging from 9 00 to 346 50 in this task As Glenn W Harrison et al 2004 correctly note this design confounds order and treatment effects since the high real payment choice was always completed after the low real and high hypothetical payment tasks In a new experiment reported below we first seek to replicate Harrison et al s finding that the order effect participating in a low payment choice before making a high payment choice magnifies the scale effect In a second treatment each subject completes the menu of lottery choices under just one payment condition 1 or 20 real or hypothetical thereby eliminating any order effects SUSAN K LAURY I New Data The new experiment was conducted in 2004 using 216 subjects recruited from undergraduate economics classes at the University of Virginia 1 As in our previous experiment each session began with a lottery choice trainer and a second unrelated experiment Results are presented in Table 1 For comparison we include data from the Holt and Laury 2002 experiment as shown in the top two rows of Table 1 and from Harrison et al s 2005 experiment in rows three and four In the first treatment of



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