Robust inference in risk elicitation tasks
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Robust inference in risk elicitation tasks Ola Andersson 1,2 & Håkan J. Holm 3 & Jean-Robert Tyran 4,5 & Erik Wengström 3,6 # The Author(s) 2020
Abstract Recent experimental evidence suggests that noisy behavior correlates strongly with personal characteristics. Since decision noise leads to bias in most elicitation tasks, there is a risk of falsely interpreting noise-driven relationships as preference driven. This puts previous studies that found a negative relation between personality measures and risk aversion into perspective and in particular raises the question of how to achieve robust inference in this domain. This paper shows, by way of an economic experiment with subjects from all walks of life, that using structural estimation to model heterogeneity of noise in combination with a balanced design allows us to mitigate the bias problem. Our estimations show that cognitive ability is related to noisy behavior rather than risk preferences. We also find age and education to be strongly related to noise, but the personality characteristics obtained using the Big Five inventory are less related to noise and more robustly correlated to risk preferences. Keywords Risk preference . Cognitive ability . Experiment . Noise . Structural estimation JEL Classification C81 . C91 . D12 . D81
1 Introduction To err is human, as the proverb says, but the empirical fact is that some people are more likely to err than others. Previous research has shown that error propensities are related to
* Ola Andersson [email protected]
1
Department of Economics and UCFS, Uppsala University, Kyrkogårdsgatan 10, 751 20 Uppsala, Sweden
2
Research Institute of Industrial Economics, Stockholm, Sweden
3
Department of Economics, Lund University, Box 7082, 220 07 Lund, Sweden
4
University of Vienna, Oskar-Morgenstern-Platz 1, A-1090 Vienna, Austria
5
University of Copenhagen, Copenhagen, Denmark
6
Department of Finance and Economics, Hanken School of Economics, Helsinki, Finland
Journal of Risk and Uncertainty
observable characteristics such as cognitive ability, education, age and gender (Andersson et al. 2016; Choi et al. 2014; von Gaudecker et al. 2011; Burks et al. 2009; Eckel 1999). Since decision noise leads to bias in most elicitation tasks (see, for example, Crosetto and Filippin 2016), there is a risk of falsely interpreting noise-driven relationships as preference driven. In Andersson et al. (2016), we show that this danger is real by demonstrating that cognitive ability can be both positively and negatively correlated to estimated risk preferences, depending on how the risk elicitation task is constructed. This suggests that the relationship between cognitive ability and risk preferences reported in the earlier literature may be spurious (see, e.g., Benjamin et al. 2013; Dohmen et al. 2010). The previous evidence shows that decision errors are heterogeneous, which may lead to spurious inference regarding the relationship between risk preferences and personal characteristics. This problem should be taken seriousl
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