High Stakes Behavior with Low Payoffs: Inducing Preferences with Holt-Laury Gambles

Abstract

A continuing goal of experiments is to understand risky decisions when the decisions are important. Often a decision’s importance relates to the magnitude of the associated monetary stake. Khaneman and Tversky (1979) argue that risky decisions in high stakes environments can be informed using questionnaires with hypothetical choices (since subjects have no incentive to answer questions falsely.) However, results reported by Holt and Laury (2002, henceforth HL), as well as replications by Harrison et al. (2005) suggest that questionnaire responses and decisions in "low" monetary payoff environments do not effectively predict decisions in "high" monetary payoff environments. Thus, a potential implication of the HL results is that studying decisions in high stakes environments requires using high stakes. Here we describe and implement a procedure for studying high-stakes behavior in a low-stakes environment. We use the binary-lottery reward technique (introduced by Berg, et al (1986)) to induce preferences in a way that is consistent with the decisions reported by HL under a variety of stake sizes. The resulting decisions, all made in low-stakes environments, reflect surprisingly well the noisy choice behavior reported by HL’s subjects even in their high-stakes environment. This finding is important because inducing preferences evidently requires substantially less cost than paying people to participate in extremely high-stakes games.

Keywords: Inducing preferences, high-stakes, experiments

JEL Classification: C81, C91, D81