The risk elicitation puzzle revisited: Across-methods (in)consistency?
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The risk elicitation puzzle revisited: Across‑methods (in) consistency? Felix Holzmeister1 · Matthias Stefan2 Received: 21 February 2019 / Revised: 3 July 2020 / Accepted: 17 August 2020 © The Author(s) 2020
Abstract With the rise of experimental research in the social sciences, numerous methods to elicit and classify people’s risk attitudes in the laboratory have evolved. However, evidence suggests that attitudes towards risk may vary considerably when measured with different methods. Based on a within-subject experimental design using four widespread risk preference elicitation tasks, we find that the different methods indeed give rise to considerably varying estimates of individual and aggregate level risk preferences. Conducting simulation exercises to obtain benchmarks for subjects’ behavior, we find that the observed heterogeneity in risk preference estimates across methods is qualitatively similar to the heterogeneity arising from independent random draws from the choice distributions observed in the experiment. Our study, however, provides evidence that subjects are surprisingly well aware of the variation in the riskiness of their choices. We argue that this calls into question the common interpretation of variation in revealed risk preferences as being inconsistent. Keywords Risk preference elicitation · Inconsistent behavior · Risk attitudes JEL Classification C91 · D81 “You are—face it—a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it.” —Adam Smith (1968), The Money Game.
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1068 3-020-09674-8) contains supplementary material, which is available to authorized users. * Felix Holzmeister [email protected] 1
Department of Economics, University of Innsbruck, Innsbruck, Austria
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Department of Banking and Finance, University of Innsbruck, Innsbruck, Austria
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F. Holzmeister, M. Stefan
1 Introduction Risk is an integral part of many economic decisions and, thus, has been considered a key building block of economic theory (Arrow 1965). As a consequence, the question how to properly elicit and classify individuals’ risk preferences is of vital importance in academic research. In experimental economics and psychology, irrespective of differences in their approaches, incentivized risk preference elicitation tasks have evolved as widely accepted tools to measure and assess individuallevel attitudes towards risk. While economists and psychologists have developed a variety of competing methodologies, a consensus on which of the elicitation procedures gives rise to the most accurate estimates of individual-level risk preferences has not been reached yet (Charness et al. 2013). Facing this pluralism of methods, pragmatism prevails among researchers when choosing among various competing risk preference elicitation tasks. The implicit assumption behind this common practice is the procedural invariance axiom, which states that normat
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