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

24 Pages Posted: 8 Jun 2009  

John W. Dickhaut

Chapman University (Deceased)

Daniel Houser

George Mason University - Department of Economics

Jason Anthony Aimone

Baylor University - Department of Economics

Dorina Tila

George Washington University

Cathleen A. Johnson

University of Arizona, Philosophy, Politics, Economics and Law Program; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: May 29, 2009

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

Suggested Citation

Dickhaut, John W. and Houser, Daniel and Aimone, Jason Anthony and Tila, Dorina and Johnson, Cathleen A., High Stakes Behavior with Low Payoffs: Inducing Preferences with Holt-Laury Gambles (May 29, 2009). Available at SSRN: https://ssrn.com/abstract=1411802 or http://dx.doi.org/10.2139/ssrn.1411802

John Dickhaut

Chapman University (Deceased)

Daniel Houser

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

Jason Anthony Aimone (Contact Author)

Baylor University - Department of Economics ( email )

P.O. Box 98003
Waco, TX 76798-8003
United States

Dorina Tila

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Cathleen Amanda Johnson

University of Arizona, Philosophy, Politics, Economics and Law Program ( email )

Social and Behavioral Sciences
Tucson, AZ 85721-0108
United States

Center for Interuniversity Research and Analysis on Organization (CIRANO)

Montreal, Quebec H3C 3J7
Canada

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