Belief Elicitation in Experiments: Is There a Hedging Problem?

Abstract

Belief-elicitation experiments usually reward accuracy of stated beliefs in addition to payments for other decisions. But this allows risk-averse subjects to hedge with their stated beliefs against adverse outcomes of the other decisions. So can we trust the existing belief-elicitation results? And can we avoid potential hedging confounds? We propose an experimental design that theoretically eliminates hedging opportunities. Using this design we test for the empirical relevance of hedging effects in the lab. Our results suggest that hedging confounds are not a major problem if hedging opportunities are not very prominent. But if hedging opportunities are transparent, and incentives to hedge are strong, many subjects do spot hedging opportunities and respond to them. The bias can go beyond players actually hedging themselves, because some expect others to hedge best respond to this.

Keywords: Belief Elicitation, Hedging, Experimental Methodology, Experimental Economics

JEL Classification: C72, C90