Risk Aversion and Incentive Effects: Comment

Charles A. Holt and Susan K. Laury (2002) (HL) develop an experimental design to determine the risk attitude of an individual. They use their observations to argue that increased incentives appear to change riks attitudes, leading to greater risk aversion. Popular utility functions that do not allow...

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Bibliographic Details
Published in:The American economic review 2005-06, Vol.95 (3), p.897-901
Main Authors: Harrison, Glenn W., Johnson, Eric, Melayne M. Mc Innes, Rutström, E. Elisabet
Format: Article
Language:English
Subjects:
Approximation
Attitudes
Demographics
Design analysis
Design of experiments
Economic theory
Expected utility
Experiment design
Experimental economics
Investment policy
Lotteries
Microeconomics
Modeling
Probabilities
Psychological attitudes
Regression analysis
Risk aversion
Risk aversion preference
Risk theory
Shorter Papers
Studies
Utility functions
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Summary:Charles A. Holt and Susan K. Laury (2002) (HL) develop an experimental design to determine the risk attitude of an individual. They use their observations to argue that increased incentives appear to change riks attitudes, leading to greater risk aversion. Popular utility functions that do not allow for such effects are therefore misspecified. Building on this finding, they estimate a flexible utility function that characterizes their aggregate data well, but does not assume constant (absolute of relative) risk aversion. This paper describes a new series of experiments that build closely on the basic desing features of HL, but allow the identification of the extent to which the apparent scale effects on risk are actually order effects. This paper reaffirms the primary conclusion of HL that risk aversion varies over the income range found in typical experiments.
ISSN:0002-8282
1944-7981
1944-7981
DOI:10.1257/0002828054201378