Risk Attitude in Real Decision Problems

Abstract

JEL classification: C15, C23, C25, D81 Keywords: Panel Data, Unobserved heterogeneity, Choice under risk ABSTRACTExperimental economics focuses on eliciting preferences, studying individuals one at a time to take into account their heterogeneity. Experiments have the appealing property of collecting enough observations to perform such an analysis. In real word, and in natural experiments, individuals cannot be observed according to experimenters' needs.We propose a method that aggregates over individuals taking into account their heterogeneity. Using data from a natural experiment, we estimate three models of decision making under risk: Expected Utility, Rank-Dependent Expected Utility and Regret-Rejoice. Our results show that individual-wise analyses can be substituted by pooled approaches without losing information about individual heterogeneity. RISK ATTITUDE IN REAL DECISION PROBLEMSThis paper aims at providing new evidence on risk aversion, focussing on aggregation over individuals eliciting their heterogeneity. The relevance of this topic is twofold: from a theoretical point of view, by showing that differences among people significantly affect their decisions, we highlight the need for theoretical developments which can better account for diversity. From an applied viewpoint, the statistical significance of such individual factors allows for better estimates than the ones one obtains when disregarding this issue.In lab experiments, individuals are observed as many times as the experimenter needs.This has provided ground for a flourishing literature focussing on the analysis of choice rules estimated individual by individual. Such a kind of approach is nearly unfeasible when data stemming from natural experiments are used. However, natural experiments' datasets are very attractive for they have the benefit of salient incentives. Therefore, in order to study choice rules when the number of observations on each individual is exogenously determined, researchers need to pool individual data.Participants both in lab and natural experiments differ in crucial characteristics. In pooling their data, we cannot discard this fact. Using data from a natural experiment, namely a TV show, which involves players taking decisions between risky prospects with outcomes up to half-a-million euros, we estimate three models of decision making under risk: Expected Utility, Rank-Dependent Expected Utility and Regret-Rejoice. The characteristics of the game, which involves lotteries composed of small and very large prizes, allow us to investigate the performance of the Rank-Dependent Expected Utility 2 (RD) and Regret-Rejoice (RR) utility functionals 1 in addition to the standard Expected Utility (EU) functional.Our research is designed to capture nuances in players' behaviour neglected by the EU formulation. Specifically, with the introduction of a RD functional, we can take into account the fact that some players appear to overweight the extreme prizes of a lottery with respect to the others; while the RR functional allows us ...

Mixture models of choice under risk

“…This heterogeneity can be taken into account by modelling the parameters as being distributed within the population from 16 which our subjects are drawn. This kind of heterogeneity has already been considered in the literature (see Botti et al, 2007). Heterogeneity of preference functionals across individuals is more difficult to take into account, and this we do by using a Mixture Model (like and Harrison and…”

Measuring Risk Attitudes Controlling for Personality Traits

“…3 There is typically a wide variation of measured risk attitudes in a study and across studies. As suggested by Mulino, Scheelings, Brooks, and Faff (2006) and Botti et al (2007) risk aversion is affected by individual-specific characteristics, such as age and gender. Additionally, as hinted by Baltussen, Post, Thaler, and van den Assem (2008), the effects of prior outcomes and the role of cultural, 2 See Cox, Sadiraj, Vogt, and Dasgupta (2007) for a test of various models of risk aversion including the dual self model of Fudenberg and Levine (2006).…”

“…One that has received considerable attention recently is the game show Deal or No Deal (see Deck, Lee, and Reyes 2008, Bombardini and Trebbi 2005, Mulino, Scheelings, Brooks, and Faff 2006, De Roos and Sarafidis 2006, Baltussen, Post, Thaler, and van den Assem 2008, Andersen et al 2006a,b, and Blavatsky and Pogrebna 2006, and Botti et al 2007. 3 There is typically a wide variation of measured risk attitudes in a study and across studies.…”

Estimating Risk Preferences in the Field

“…Like the pioneering studies, many of the subsequent papers work with EU models with CRRA and/or CARA utility (e.g., Fullenkamp, Tenorio, and Battalio 2003;Andersen et al 2008;Deck, Lee, and Reyes 2008;Conte et al 2012;Hartley, Lanot, and Walker 2014). Others go beyond EU and consider RDEU, prospect theory, or other non-EU models (e.g., Botti et al 2008;Post et al 2008;Mulino et al 2009;de Roos and Sarafidis 2010;Bombardini and Trebbi 2012).…”