Complexity in risk elicitation may affect the conclusions: A demonstration using gender differences

• Published in: Journal of risk and uncertainty 2018-02, Vol.56 (1), p.1-17
• Main Authors: Charness, Gary, Eckel, Catherine, Gneezy, Uri, Kajackaite, Agne
• Format: Article
• Language: English
• Subjects: Complexity; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Elicitation; Environmental Economics; Errors; Gender differences; Microeconomics; Misrepresentation; Operations Research/Decision Theory; Risk; Risk aversion; Risk preferences; Risk taking
• ISSN: 0895-5646; 1573-0476
• DOI: 10.1007/s11166-018-9274-6

The Holt and Laury (American Economic Review, 92(5), 1644-1655, 2002) mechanism (HL) is the most widely-used method for eliciting risk preferences in economics. Participants typically make ten decisions with different variance options, with one of these choices randomly chosen for actual payoff. For this mechanism to provide an accurate measure of risk aversion, participants need to understand the choices and give consistent responses. Unfortunately, inconsistent and even dominated choices are often made. Can these mistakes lead to a misrepresentation of economic phenomena? We use gender differences in risk taking to test this question. In contrast to many findings in the literature, HL results typically do not find significant gender differences. We compare the HL approach, where we replicate the lack of significant gender differences, with a simpler presentation of the same choices in which participants make only one of the ten HL decisions; this simpler presentation yields strong gender differences indicating that women are more risk averse than men. We also find gender differences in the consistency of decisions. We believe that the results found in the simpler case are more reflective of underlying preferences, since the task is considerably easier to understand. Our results suggest that the complexity and structure of the risk elicitation mechanism can affect measured risk preferences. The issue of complexity and comprehension is also likely to be present with elicitation mechanisms in other realms of economic preferences.