Context matters

Abstract

Eliciting the level of risk aversion of experimental subjects is of crucial concern to experimenters. In the literature there are a variety of methods used for such elicitation; the concern of the experiment reported in this paper is to compare them. The methods we investigate are the following: Holt-Laury price lists; pairwise choices, the Becker-DeGroot-Marschak method; allocation questions. Clearly their relative efficiency in measuring risk aversion depends upon the numbers of questions asked; but the method itself may well influence the estimated risk-aversion. While it is impossible to determine a 'best' method (as the truth is unknown) we can look at the differences between the different methods. We carried out an experiment in four parts, corresponding to the four different methods, with 96 subjects. In analysing the data our methodology involves fitting preference functionals; we use four, Expected Utility and Rank-Dependent Expected Utility, each combined with either a CRRA or a CARA utility function. Our results show that the inferred level of risk aversion is more sensitive to the elicitation method than to the assumed-true preference functional. Experimenters should worry most about context.

Keywords: Decision making; Experimental design; Experimental methods; Preference measures; Risk taking.

Fig. 1

Representation of a lottery

Fig. 2

a A price list; b a completed price list

Fig. 2

a A price list; b a completed price list

Fig. 3

A pairwise choice

Fig. 4

a The lottery (in the Becker-Degroot-Marschak mechanism); b the uniform distribution (over the range of the lottery); c a lottery choice

Fig. 5

An allocation

Fig. 6

Estimates of r using AL across preference functionals. Each scatter plots the r value elicited using the AL method across the different preference functionals

Fig. 7

Estimates of r in RRRD across elicitation methods. Each scatter plots the r value elicited using the RRRD specification across the different elicitation methods

Fig. 8

Estimates of r in AREU across elicitation methods. Each scatter plots the r value elicited using the AREU specification across the different elicitation methods

Fig. 9

Estimates of s in RRRD across elicitation methods. Each scatter plots the s value elicited using the RRRD specification across the different elicitation methods