Exploring the consistency of higher order risk preferences. (English) Zbl 1444.91080
Summary: This study measures higher order risk preferences and their consistency. We explore the role of country differences, the variation of stakes, and the framing of lotteries. We observe a robust dichotomous pattern of choice behavior in China, the United States, and Germany. The majority of choices are consistent with mixed risk aversion or mixed risk-loving behavior. We also find this pattern after a 10-fold increase in the stakes. Finally, our results reveal that this pattern is strengthened if the lotteries are displayed in compound instead of reduced form. In a follow-up study, we explore potential explanations for this framing effect.
MSC:
| 91B05 | Risk models (general) |
| 91-05 | Experimental work for problems pertaining to game theory, economics, and finance |
References:
| [1] | Abdellaoui, M., P.Klibanoff, and L.Placido, “Experiments on Compound Risk in Relation to Simple Risk and to Ambiguity,” Management Science61(6) (2015), 1306-22. |
| [2] | Arrow, K., Aspects of the Theory of Risk‐bearing. (Helsinki: Yrjö Jahnsson Foundation, 1965). |
| [3] | Azrieli, Y, C. P.Chambers, and P. J.Healy, “Incentives in Experiments: A Theoretical Analysis,” Journal of Political Economy126(4) (2018), 1472-1503. |
| [4] | Baillon, A., “Prudence with Respect to Ambiguity,” Economic Journal127(604) (2017), 1731-55. |
| [5] | Baillon, A., H.Schlesinger, and G.van deKuilen, “Measuring Higher Order Ambiguity Preferences,” Experimental Economics21 (2017), 233-56. |
| [6] | Baltussen, G., G. T.Post, M. J.vanden Assem, and P. P.Wakker, “Random Incentive Systems in a Dynamic Choice Experiment,” Experimental Economics15(3) (2012), 418-43. |
| [7] | Bar‐Hillel, M., “On the Subjective Probability of Compound Events,” Organizational Behavior and Human Performance9(3) (1973), 396-406. |
| [8] | Beattie, J., and G.Loomes, “The Impact of Incentives upon Risky Choice Experiments,” Journal of Risk and Uncertainty14(2) (1997), 155-68. · Zbl 0886.90051 |
| [9] | Binswanger, H. P., “Attitudes Toward Risk: Experimental Measurement in Rural India,” American Journal of Agricultural Economics62(3) (1980), 395-407. |
| [10] | Binswanger, H. P., “Attitudes Toward Risk: Theoretical Implications of an Experiment in Rural India,” Economic Journal91 (1981), 867-90. |
| [11] | Bohnet, I., F.Greig, B.Herrmann, and R.Zeckhauser, “Betrayal Aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States,” American Economic Review98(1) (2008), 294-310. |
| [12] | Bostian, A. J. and C.Heinzel, “Prudential Saving: Evidence from a Laboratory Experiment,” Working Paper, University of Virginia, Charlottesville, VA, 2012. |
| [13] | Brañas‐Garza, P., P.Kujal, and B.Lenkei, “Cognitive Reflection Test: Whom, How, When,” MPRA Working Paper No. 68049, 2015. |
| [14] | Brislin, R. W., “Back‐Translation for Cross‐cultural Research,” Journal of Cross‐Cultural Psychology1(3) (1970), 185-216. |
| [15] | Briys, E., and H.Schlesinger, “Risk Aversion and the Propensities for Self‐insurance and Self‐protection,” Southern Economic Journal57(2) (1990), 458-67. |
| [16] | Brockett, P. L., and L. L.Golden, “A Class of Utility Functions containing all the Common Utility Functions,” Management Science33(8) (1987), 955-64. · Zbl 0636.90003 |
| [17] | Buchan, N., and R.Croson, “The Boundaries of Trust: Own and Others’ Actions in the US and China,” Journal of Economic Behavior & Organization55(4) (2004), 485-504. |
| [18] | Budescu, D. V., and I.Fischer, “The Same but Different: An Empirical Investigation of the Reducibility Principle,” Journal of Behavioral Decision Making14(3) (2001), 187-206. |
| [19] | Burchardi, K. B., and S. P.Penczynski, “Out of Your Mind: Eliciting Individual Reasoning in One Shot Games,” Games and Economic Behavior84 (2014), 39-57. · Zbl 1292.91044 |
| [20] | Burks, S. V., J. P.Carpenter, L.Goette, and A.Rustichini, “Cognitive Skills Affect Economic Preferences, Strategic Behavior, and Job Attachment,” Proceedings of the National Academy of Sciences106(19) (2009), 7745-50. |
| [21] | Caballé, J., and A.Pomansky, “Mixed Risk Aversion,” Journal of Economic Theory71 (1996), 485-513. · Zbl 0877.90009 |
| [22] | Cokely, E. T., M.Galesic, E.Schulz, S.Ghazal, and R.Garcia‐Retamero,“Measuring Risk Literacy: The Berlin Numeracy Test,” Judgement and Decision Making7(1) (2012), 25-47. |
| [23] | Courbage, C., and B.Rey, “Prudence and Optimal Prevention for Health Risks,” Health Economics15 (2006), 1323-27. |
| [24] | Courbage, C., and B.Rey, “Decision Thresholds and Changes in Risk for Preventive Treatment,” Health Economics25 (2016), 111-24. |
| [25] | Cox, J. C., V.Sadiraj, and U.Schmidt, “Paradoxes and Mechanisms for Choice under Risk,” Experimental Economics18(2) (2015), 215-50. |
| [26] | Crainich, D., L.Eeckhoudt, and A.Trannoy, “Even (Mixed) Risk Seekers are Prudent,” American Economic Review103(4) (2013), 1529-35. |
| [27] | Cubitt, R., R.Starmer, and R.Sugden, “On the Validity of the Random Lottery Incentive System,” Experimental Economics1(2) (1998), 115-31. · Zbl 0928.91016 |
| [28] | Deck, C., and H.Schlesinger, “Exploring Higher Order Risk Effects,” Review of Economic Studies77(4) (2010), 1403-20. · Zbl 1202.91047 |
| [29] | Deck, C., and H.Schlesinger, “Consistency of Higher Order Risk Preferences,” Econometrica82(5) (2014), 1913-43. · Zbl 1419.91287 |
| [30] | Deck, C., and H.Schlesinger, “On the Robustness of Higher Order Risk Preferences,” Journal of Risk and Insurance85(2) (2017), 313-33. |
| [31] | Dionne, G., and L.Eeckhoudt, “Self‐insurance, Self‐protection and Increased Risk Aversion,” Economics Letters17 (1985), 39-42. · Zbl 1273.91235 |
| [32] | Dohmen, T., A.Falk, D.Huffman, and U.Sunde, “Are Risk Aversion and Impatience Related to Cognitive Ability?” American Economic Review100(3) (2010), 1238-60. |
| [33] | Ebert, S., “Even (Mixed) Risk‐Seekers are Prudent: Comment,” American Economic Review103(4) (2013), 1536-37. |
| [34] | Ebert, S., D.Nocetti, and H.Schlesinger, “Greater Mutual Aggravation,” Management Science64(6) (2017), 2809-11. |
| [35] | Ebert, S., and G.van deKuilen, “Measuring Multivariate Risk Preferences,” Working Paper, 2015. |
| [36] | Ebert, S., and D.Wiesen, “Testing for Prudence and Skewness Seeking,” Management Science57(7) (2011), 1334-49. · Zbl 1228.91021 |
| [37] | Ebert, S., and D.Wiesen, “Joint Measurement of Risk Aversion, Prudence, and Temperance.” Journal of Risk and Uncertainty48(3) (2014), 231-52. |
| [38] | Eeckhoudt, L., Risk and Medical Decision Making (Boston: Kluwer, 2002). |
| [39] | Eeckhoudt, L., and C.Gollier, “The Impact of Prudence on Optimal Prevention,” Economic Theory26(4) (2005), 989-94. · Zbl 1116.91335 |
| [40] | Eeckhoudt, L., C.Gollier, and H.Schlesinger, “Changes in Background Risk and Risk Taking Behavior,” Econometrica64(3) (1996), 683-89. · Zbl 0849.90002 |
| [41] | Eeckhoudt, L., and M.Kimball, “Background Risk, Prudence, and the Demand for Insurance.” in G.Dionne (ed.), ed., Contributions to Insurance Economics, (Netherlands: Springer, 1992), 239-54. |
| [42] | Eeckhoudt, L., and H.Schlesinger, “Putting Risk in Its Proper Place,” American Economic Review96 (2006), 280-89. |
| [43] | Eeckhoudt, L., and H.Schlesinger, “Changes in Risk and the Demand for Saving,” Journal of Monetary Economics55(7) (2008), 1329-36. |
| [44] | Eeckhoudt, L., H.Schlesinger, and I.Tsetlin, “Apportioning of Risks via Stochastic Dominance,” Journal of Economic Theory144 (2009), 994-1003. · Zbl 1160.91322 |
| [45] | Ehmke, M., J.Lusk, and W.Tyner, “Multidimensional Tests for Economic Behavior Differences across Cultures,” Journal of Socio‐Economics39(1) (2010), 37-45. |
| [46] | Ehrlich, I., and G.Becker, “Market Insurance, Self‐insurance, and Self‐protection,” Journal of Political Economy80(4) (1972), 623-48. |
| [47] | Ekern, S., “Increasing Nth Degree Risk,” Economics Letters6(4) (1980), 329-33. |
| [48] | Ellsberg, D., “Risk, Ambiguity, and the Savage Axioms,” Quarterly Journal of Economics75(4) (1961), 643-69. · Zbl 1280.91045 |
| [49] | Esö, P., and L.White, “Precautionary Bidding in Auctions,” Econometrica72(1) (2004), 77-92. · Zbl 1152.91458 |
| [50] | Falk, A., A.Becker, T. J.Dohmen, B.Enke, D.Huffman, and U.Sunde, “The Nature and Predictive Power of Preferences: Global Evidence,” IZA Discussion Paper 9504, 2015. |
| [51] | Fehr‐Duda, H., A.Bruhin, T.Epper, and R.Schubert, “Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size,” Journal of Risk and Uncertainty40 (2010), 147-80. |
| [52] | Felder, S., and T.Mayrhofer, “Risk Preferences: Consequences for Test and Treatment Thresholds and Optimal Cutoffs,” Medical Decision Making34(1) (2014), 33-41. |
| [53] | Felder, S., and T.Mayrhofer, Medical Decision Making: A Health Economic Primer, 2nd edition (Berlin Heidelberg: Springer, 2017). · Zbl 1370.92001 |
| [54] | Fischbacher, U., “Z‐tree: Zurich Toolbox for Readymade Economic Experiments,” Experimental Economics10(2) (2007), 171-78. |
| [55] | Frederick, S., “Cognitive Reflection and Decision Making,” Journal of Economic Perspectives19(4) (2005), 25-42. |
| [56] | Gollier, C., and J. W.Pratt, “Risk Vulnerability and the Tempering Effect of Background Risk,” Econometrica64(5) (1996), 1109-23. · Zbl 0856.90014 |
| [57] | Greiner, B., “Subject Pool Recruitment Procedures: Organizing Experiments with ORSEE,” Journal of the Economic Science Association1(1) (2015), 114-25. |
| [58] | Grether, D. M., and C. R.Plott, “Economic Theory of Choice and the Preference Reversal Phenomenon,” American Economic Review69(4) (1979), 623-38. |
| [59] | Grisley, W., and E.Kellog, “Risk‐taking Preferences of Farmers in Northern Thailand: Measurements and Implications,” Agricultural Economics1 (1987), 127-42. |
| [60] | Haering, A., and T.Heinrich, “Risk preferences in China: Results from experimental economics.” ASIEN 142 (2017), 66-88. |
| [61] | Haering, A., T.Heinrich, and T.Mayrhofer, “Exploring the consistency of higher‐order risk preferences,” Ruhr Economic Papers No. 688, 2017. |
| [62] | Harrison, G. W., J.Martínez‐Correa, and J. T.Swarthout, “Reduction of Compound Lotteries with Objective Probabilities: Theory and Evidence,” Journal of Economic Behavior and Organization119 (2015), 32-55. |
| [63] | Harrison, G. W., and J. T.Swarthout, “Experimental Payment Protocols and the Bipolar Behaviorist,” Theory and Decision77(3) (2014), 423-38. |
| [64] | Heinrich, T., and T.Mayrhofer, “Higher‐order Risk Preferences in Social Settings,” Experimental Economics21(2) (2018), 434-56. |
| [65] | Heinrich, T., and J.Shachat, “The Development of Risk Aversion and Prudence in Chinese Children and Adolescents,” Mimeo, 2018. |
| [66] | Herrmann, B., C.Thöni, and S.Gächter, “Antisocial Punishment across Societies,” Science319(5868) (2008), 1362-67. |
| [67] | Hofstede, G., Culture’s Consequences: International Differences in Work‐related Values (Beverly Hills, CA: Sage Publications, 1980). |
| [68] | Hofstede, G., G. J.Hofstede, and M.Minkov, Cultures and Organizations: Software of the Mind Volume 3 (London: McGraw‐Hill, 2010). |
| [69] | Holt, C. A., and S. K.Laury, “Risk Aversion and Incentive Effects,” American Economic Review92(5) (2002), 1644-55. |
| [70] | Holt, C. A., and S. K.Laury, “Risk Aversion and Incentive Effects: New Data without Order Effects,” American Economic Review95(3) (2005), 902-04. |
| [71] | Hsee, C., and E. U.Weber, “Cross‐national Differences in Risk Preference and Lay Predictions,” Journal of Behavioral Decision Making12 (1999), 165-79. |
| [72] | Kachelmeier, S. J., and M.Shehata, “Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People”s Republic of China,” American Economic Review82(5) (1992a), 1120-41. |
| [73] | Kachelmeier, S. J., and M.Shehata, “Culture and Competition: A Laboratory Market Comparison between China and the West,” Journal of Economic Behavior and Organization19(2) (1992b), 145-68. |
| [74] | Kimball, M. S., “Precautionary Saving in the Small and in the Large,” Econometrica58(1) (1990), 53-73. |
| [75] | Kimball, M. S., “Precautionary Motives for Holding Assets,” in P.Newman (ed.), M.Milgate (ed.), and J.Falwell (ed.), eds., The New Palgrave Dictionary of Money and Finance (London: Macmillan, 1992), 158-161. |
| [76] | Kocher, M. G., J.Pahlke, and S. T.Trautmann, “An Experimental Study of Precautionary Bidding,” European Economic Review78 (2015), 27-38. |
| [77] | Krieger, M., and T.Mayrhofer, “Patient Preferences and Treatment Thresholds under Diagnostic Risk: An Economic Laboratory Experiment,” Ruhr Economic Papers No. 321, 2012. |
| [78] | Krieger, M., and T.Mayrhofer, “Prudence and Prevention: An Economic Laboratory Experiment,” Applied Economics Letters24(1) (2017), 19-24. |
| [79] | Krippendorff, K., Content Analysis: An Introduction to its Methodology (Thousand Oaks, CA: Sage Publications, 2004). |
| [80] | Lajeri‐Chaherli, F., “Proper Prudence, Standard Prudence and Precautionary Vulnerability,” Economics Letters82(1) (2004), 29-34. · Zbl 1254.91271 |
| [81] | Levitt, S. D., and J. A.List, “What do Laboratory Experiments Measuring Social Preferences Reveal about the Real World?” Journal of Economic Perspectives21(2) (2007), 153-74. |
| [82] | Lichtenstein, S., and P.Slovic, “Reversals of Preference between Bids and Choices in Gambling Decisions,” Journal of Experimental Psychology89(1) (1971), 46-55. |
| [83] | Lindman, H. R., “Inconsistent Preferences among Gambles,” Journal of Experimental Psychology89(2) (1971), 390-97. |
| [84] | Maier, J., and M.Rüger, “Experimental Evidence on Higher‐Order Risk Preferences with Real Monetary Losses,” Working Paper, University of Munich, 2012. |
| [85] | Markowitz, H., “The Utility of Wealth,” Journal of Political Economy60(2) (1952), 151-58. |
| [86] | Mayrhofer, T., and H.Schmitz, “Prudence and Prevention: An Empirical Investigation,” Mimeo, 2019. |
| [87] | Nocetti, D. C., “Robust Comparative Statics of Risk Changes,” Management Science62(5) (2015), 1381-92. |
| [88] | Noussair, C. N., S. T.Trautmann, and G.van deKuilen, “Higher Order Risk Attitudes, Demographics, and Financial Decisions,” Review of Economic Studies81(1) (2014), 325-55. · Zbl 1405.91126 |
| [89] | OECD, “Purchasing Power Parities (PPP),” https://doi.org/10.1787/1290ee5a-en (Accessed on 02 March 2015), 2015. · doi:10.1787/1290ee5a-en |
| [90] | Oosterbeek, H., R.Sloof, and G.van deKuilen, “Cultural Differences in Ultimatum Game Experiments: Evidence from a Meta‐analysis,” Experimental Economics7(2) (2004), 171-88. · Zbl 1091.91016 |
| [91] | Özer, Ö., Y.Zheng, and Y.Ren, “Trust, Trustworthiness, and Information Sharing in Supply Chains Bridging China and the United States,” Management Science60(10) (2014), 2435-60. |
| [92] | Peter, R., “Optimal Self‐protection in Two Periods: On the Role of Endogenous Saving,” Journal of Economic Behavior & Organization137 (2017), 19-36. |
| [93] | Pratt, J., “Risk Aversion in the Small and in the Large,” Econometrica32(1‐2) (1964), 122-36. · Zbl 0132.13906 |
| [94] | Quiggin, J., “A Theory of Anticipated Utility,” Journal of Economic Behavior & Organization3(4) (1982), 323-43. |
| [95] | Rieger, M. O., M.Wang, and T.Hens, “Risk Preferences around the World,” Management Science61(3) (2015), 637-48. |
| [96] | Roth, A. E., V.Prasnikar, M.Okuno‐Fujiwara, and S.Zamir, “Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study,” American Economic Review81(5) (1991), 1068-95. |
| [97] | Samuelson, P. A., “Probability, Utility, and the Independence Axiom,” Econometrica20(4) (1952), 670-78. · Zbl 0047.13804 |
| [98] | Segal, U., “The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach,” International Economic Review28(1) (1987), 175-202. · Zbl 0659.90010 |
| [99] | Segal, U., “Does the Preference Reversal Phenomenon Necessarily Contradict the Independence Axiom?” American Economic Review78(1) (1988), 233-36. |
| [100] | Segal, U., “Two‐stage Lotteries without the Reduction Axiom,” Econometrica58(2) (1990), 349-77. · Zbl 0728.90013 |
| [101] | Slovic, P., “Manipulating the Attractiveness of a Gamble Without Changing its Expected Value,” Journal of Experimental Psychology79(1 Pt1) (1969), 139-45. |
| [102] | Starmer, C., and R.Sugden, “Does the Random‐Lottery Incentive System Elicit True Preferences? An Experimental Investigation,” American Economic Review81(4) (1991), 971-78. |
| [103] | Statman, M., “Countries and Culture in Behavioral Finance,” CFA Institute Conference Proceedings Quarterly25(3) (2008), 38-44. |
| [104] | Sutter, M., M. G.Kocher, D.Glätzle‐Rützler, and S. T.Trautmann, “Impatience and Uncertainty: Experimental Decisions Predict Adolescents’ Field Behavior,” American Economic Review103(1) (2013), 510-31. |
| [105] | Trautmann, S. T., and G.van deKuilen, “Higher Order Risk Attitudes: A Review of Experimental Evidence,” European Economic Review103 (2018), 108-124. |
| [106] | UBS, “Prices and Earnings,” UBS Report, 2014. https://www.ubs.com/microsites/prices-earnings/open-data.html |
| [107] | Vieider, F. M., “Moderate Stake Variations for Risk and Uncertainty, Gains and Losses: Methodological Implications for Comparative Studies,” Economics Letters117(3) (2012), 718-21. |
| [108] | Vieider, F. M., T.Chmura, T.Fisher, T.Kusakawa, P.Martinsson, F. M.Thompson, and A.Sunday, “Within‐ Versus Between‐Country Differences in Risk Attitudes: Implications for Cultural Comparisons,” Theory and Decision78(2) (2015), 209-18. · Zbl 1377.91138 |
| [109] | Vieider, F. M., M.Lefebvre, R.Bouchouicha, T.Chmura, R.Hakimov, M.Krawczyk, and P.Martinsson, “Common Components of Risk and Uncertainty Attitudes across Contexts and Domains: Evidence from 30 Countries,” Journal of the European Economic Association13(3) (2015), 421-52. |
| [110] | Weber, E. U., and C.Hsee, “Cross‐cultural Differences in Risk Perception but Cross‐cultural Similarities in Attitudes towards Perceived Risk,” Management Science44(9) (1998), 1205-17. · Zbl 0999.91050 |
| [111] | White, L., “Prudence in Bargaining: The Effect of Uncertainty on Bargaining Outcomes,” Games and Economic Behavior62(1) (2008), 211-31. · Zbl 1135.91368 |
| [112] | Wik, M., T.Kebede, O.Bergland, and S.Holden, “On the Measurement of Risk Aversion from Experimental Data,” Applied Economics36 (2004), 2443-51. |
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.
