Incentive Effects on Risk Attitude in Small Probability Prospects
University of Liege - Research Center on Public and Population Economics
University of Lyon, CNRS-GATE; German Institute for Economic Research (DIW Berlin)
Marie Claire Villeval
National Center for Scientific Research (CNRS) - Institute of Economic Theory and Analysis (GATE); Institute for the Study of Labor (IZA)
GATE Working Paper No. 09-26
Most studies on the role of incentives on risk attitude report data obtained from within-subject experimental investigations. This may however raise an issue of sequentiality of effects as later choices may be influenced by earlier ones. This paper reports instead between-subject results on the effect of monetary stakes on risk attitudes for small probability prospects in a laboratory experiment. Under low stakes, we find the typical risk seeking behavior for small probabilities predicted by the prospect theory. But under high stakes, we provide some evidence that risk seeking behavior is dramatically reduced. This could suggest that utility is not consistently concave over the outcome space, but rather contains a convex section for very small amounts.
Number of Pages in PDF File: 15
Keywords: Risk attitude, Incentives, Decision, Experiment
JEL Classification: C91, D81, D89
Date posted: December 9, 2009 ; Last revised: September 23, 2013
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