An experiment on the influence of individual risk attitudes
-
Upload
vaughan-best -
Category
Documents
-
view
16 -
download
2
description
Transcript of An experiment on the influence of individual risk attitudes
![Page 1: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/1.jpg)
An experiment on the influence of individual risk attitudes
byHermann Trenkel
Department for Food and Resource Economics
University of Bonn
FUR XII25.06.2006
![Page 2: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/2.jpg)
Measurement of individual risk attitude• Lotteries are commonly
considered as a useful method to identify the risk attitude of individuals
• Subjects state their reservation price for a specified lottery
• Using the BDM-method monetary incentives are installed in a way which elicits real reservation prices if subjects act rational
FUR XII25.06.2006
![Page 3: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/3.jpg)
Measurement of individual risk attitudeHartog,Ferrer-i-Carbonell and
Jonker1 asked: “Among 10 people, 1000 guilders are disposed of by lottery. What is the most that you would be willing to pay for a ticket in this lottery?“ in two surveys with about 3600 paricipants.FUR XII
25.06.20061: Hartog et al. (2000): On a simple measure of individual risk aversion, tinbergen institute discussion paper TI2000-074/3
![Page 4: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/4.jpg)
Measurement of individual risk attitudeIn a questionnaire in the Saturday
edition of Dutch newspapers, answered by 25.000 people, they included questions for lotteries with
• 1000 guilders are alloted among 5 people
• 5000 guilders are alloted among 10 people
• 1000 guilders are alloted among 100 people
• 1000.000 guilders are alloted among 100 people
FUR XII25.06.2006
![Page 5: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/5.jpg)
Measurement of individual risk attitudeEven though they didn´t give monetary
incentives or use any method like the BDM-method to elicit real reservation prices the results showed
• risk aversion is significantly lower for the self-employed
• risk aversion is falling with increasing income
• risk aversion is negatively related to wealth
• risk aversion is significantly reduced by schooling level
• Women have a substantially higher degree of risk aversion than men
• risk aversion increases with age
FUR XII25.06.2006
![Page 6: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/6.jpg)
Measurement of individual risk attitude• As they „…conclude that a simple
lottery question is a promising survey instrument to extract differences in risk attitudes among individuals“
• the lotteries questions are taken into my questionaire to extract risk attitudes– but we ask for € instead of guilders
• Conducting an adjacent game the hypothesis „individual risk aversion has a predictable influence on decisions in an uncertain context“ will be tested
FUR XII25.06.2006
![Page 7: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/7.jpg)
The game - participants• All participants are
students, most of them freshmen
• No monetary incentives are given
• Instead, questions and answers of last years exams were offered as award for participation
FUR XII25.06.2006
![Page 8: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/8.jpg)
The experimental game• In a paper and pencil game,
participants act as managers• Each round, they produce 10.000
items of a nonspecified good• The price for the good will be
randomly choosen from a known distribution
• The students have 2 choices:– they can produce for the random market price– they can sell their production (or parts of it) at a fixed contract price
FUR XII25.06.2006
Price distribution
0%
5%
10%
15%
20%
25%
1 2 3 4 5 6 7 8 9 10 11
Price P(x) in €
contract priceproduction costs
![Page 9: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/9.jpg)
The experimental game• Afterwards the „market price“ was
choosen by drawing a card from a deck of cards reflecting the distribution
• The game included 3 rounds• On 3 days 127 students took part
FUR XII25.06.2006
2x
4x 6x 8x 10x 8x 6x 4x 2x
![Page 10: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/10.jpg)
• the distribution now was left-skewed
• The game lasted 4 rounds• On 2 occasions 164 students
took part
The experiment – 1. repetition
FUR XII25.06.2006
left skewed price distribution
0
5
10
15
20
25
2 3 4 5 6 7 8 9 10
€uro
%
Contract price =production costs
![Page 11: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/11.jpg)
The experiment – test for consistency• As 3 lotteries offer the same prize
(1000 €) among different numbers of participants (5, 10 or 100), rationally the reservation price for a lottery with more participants cannot be higher as for a lottery with less participants
• Demanding the reservation price for lotterie 1 > lotterie 2 > lotterie 4 in the 2004 experiment only 63 (from 127) and in the 2005 experiment 113 (from 164) remain
• Most of the dropouts stated the same reservation price, i.e. 5 € for all lotteries
FUR XII25.06.2006
![Page 12: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/12.jpg)
The experiment – reservation prices
FUR XII25.06.2006
lottery 2004 2005 all female
male
n 63 113 176 110 66
5/1000E(x) = 200
43,8 64,1 56,9 45,3 76,3
10/1000E(x) = 100
20,1 30,2 26,6 22,1 34,1
10/5000E(x) = 500
63,0 102 90,3 63,4 135,2
100/1000E(x) = 10
3,5 5,2 4,6 3,9 5,7
100/1MioE(x) = 10T
499 686 619 359 1053
0
100
200
300
400
500
600
700
800
0 2000 4000 6000 8000 10000 12000
E(x)
reserv
atio
n p
rice
![Page 13: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/13.jpg)
The experiment – reservation price coefficientBy dividing the reservation prices for the lotteries by the expected values of the lotteries a Reservation Price Coefficient RPcoeff was calculated
For risk neutrality RPcoeff = 1, with increasing risk aversion it moves towards 0.
FUR XII25.06.2006
RPcoeffvalueExpected
pricenreservatio
i i
i
5:_
_5
1
![Page 14: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/14.jpg)
The experiment – reservation price coefficient
FUR XII25.06.2006
Reservation Price coefficient
0
10
20
30
40
50
60
70
80
90
0,0-0,1
0,1-0,2
0,2-0,3
0,3-0,4
0,4-0,5
0,5-0,6
0,6-0,7
0,7-0,8
0,8-0,9
0,9-1,0
>1,0
RPcoeff (mean = 0,25)
freq
uen
cy (
n =
176
)
![Page 15: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/15.jpg)
The experiment – core question and hypothesis• Is the RPcoeff as a measure
of individual risk aversion a predictor for actions in the game?
• Individuals with high risk aversion should contract a higher amount of their production
• individuals tending towards risk neutrality should sell on the free market
FUR XII25.06.2006
![Page 16: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/16.jpg)
The experiment – results
FUR XII25.06.2006
00,20,40,60,8
11,21,41,61,8
0 20 40 60 80 100
contract %
RP
coef
f. →no evidence for any relation between the answers to the lotteries and the performance in the game
![Page 17: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/17.jpg)
The experiment – new risk aversion measurement• A question to self-estimate
oneselfs risk-attitude was inserted
• It was used by FALK et al. (2005)1 with outstanding results
FUR XII25.06.2006
Are You someone who accepts risks or do You avoid risk?
Avoid risk willing to take risk 0 1 2 3 4 5 6 7 8 9 10
1: FALK et al. (2000): Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey
![Page 18: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/18.jpg)
The experiment with monetary rewards• 4 training rounds, but now
contracts were only allowed for 100 % of the production each round
• 4 rounds with monetary rewards: 5 students would afterwards be randomly choosen and get their results payed out in 1/20 cents
• Instead of selling at a fixed contract price participants had to report their minimum price for selling the whole production
• Only the 30 % with the lowest offers would get a contract
FUR XII25.06.2006
![Page 19: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/19.jpg)
The monetary experiment - results
• Only 30 consistent participants
FUR XII25.06.2006
Reservation Price Coefficient
Average Female Male
monetary (n = 30)
0,25110,2063 n = 11
0,2782 n = 19
previous (n = 176)
0,25040,2007n = 110
0,3332n = 66
![Page 20: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/20.jpg)
The monetary experiment - results
FUR XII25.06.2006
RPcoeff.
0
2
4
6
8
10
12
0,0-0,1
0,1-0,2
0,2-0,3
0,3-0,4
0,4-0,5
0,5-0,6
0,6-0,7
0,7-0,8
0,8-0,9
0,9-1,0
>1,0
RPcoeff (mean = 0,25)
freq
uen
cie
s n
= 3
0
![Page 21: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/21.jpg)
The monetary experiment - results
FUR XII25.06.2006
risk attitude self estimation
0
10
20
30
40
1 2 3 4 5 6 7 8 9 10
Per
cen
t
female (mean = 4,73) male (mean = 5,05)
![Page 22: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/22.jpg)
The monetary experiment - results
FUR XII25.06.2006
0
0,2
0,4
0,6
0,8
1
0 1 2 3 4 5 6 7 8
self estimation
RP
co
eff
female male
![Page 23: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/23.jpg)
The monetary experiment - results
FUR XII25.06.2006
• Production costs = 72.000• Expected value = 84.000
1.round 2.round 3.round 4.round
market price 8 9 9 8
selling average
85349 85087 84890 82217
median 85000 84310 84000 81999
best contract 81999 82500 82000 81200
Minimum 72050 76000 79000 71000
Maximum 100000 99700 96000 95456
![Page 24: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/24.jpg)
The monetary experiment - results
FUR XII25.06.2006
71000
76000
81000
86000
91000
96000
101000
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9
RP coeff
sell
ing
pri
ce
1.round 2.round 3.round 4.round
![Page 25: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/25.jpg)
The monetary experiment - results
FUR XII25.06.2006
71000
76000
81000
86000
91000
96000
101000
0 2 4 6 8
risk attitude self estimation
elic
ited
sel
lin
g p
rice
1.round 2.round 3.round 4.round
![Page 26: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/26.jpg)
The monetary experiment - results
FUR XII25.06.2006
1.round 2.round 3.round 4.round
RPcoeff market
0,27 0,25 0,30* 0,29
RPcoeff contract
0,21 0,26 0,13* 0,14
Self est. market
4,77 4,67 5,14 5,00
Self est. contract
5,22 5,40 4,33 4,63
![Page 27: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/27.jpg)
The monetary experiment - results
FUR XII25.06.2006
76000
80000
84000
88000
92000
96000
100000
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9
RP coeff
sell
ing
pri
ce
best contract 3.round
![Page 28: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/28.jpg)
Conclusions• Gender difference for risk aversion in
lotteries is confirmed • Predictive power of individual risk
aversion elicited from lottery reservation prices towards actions in a managerial game seems poor
• Instead of risk aversion it seems to be loss aversion: After the students accumulated money in 2 high priced rounds, they started to behave somewhat more consistent
• The only way to get a relation is to look the other way round: those, who act risk averse in the game are likely to be risk averse as well in the lottery questions
FUR XII25.06.2006
![Page 29: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/29.jpg)
Open questions
• Could different risk categories be a possible explanation?
• How to control for an effect of the term „contract“, as some of the students may have an attitude towards contracts?
• Is a game with several repetitions to complex?
• How to control for „terminal wealth“ effects?
FUR XII25.06.2006
![Page 30: An experiment on the influence of individual risk attitudes](https://reader038.fdocuments.net/reader038/viewer/2022110405/56813237550346895d989c5c/html5/thumbnails/30.jpg)
Thank You
FUR XII25.06.2006