Eliciting Risk Preferences: When is Simple Better?

37 Pages Posted: 13 Jul 2011

See all articles by Chetan Dave

Chetan Dave

New York University

Catherine C. Eckel

Texas A&M University

Cathleen A. Johnson

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

Christian Rojas

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Date Written: December 1, 2008

Abstract

We study the estimation of risk aversion preferences with experimental data. The focus is on the trade-offs that arise when choosing between two different elicitation methods that have different degrees of difficulty for subjects. We analyze how and when the simpler, but coarser, elicitation method may be preferred to the more complex, but finer, one. Results indicate that the more complex measure has an overall superior predictive accuracy, but its downside is that subjects exhibit noisier behavior; conversely, the simpler measure has the opposite costs and benefits. Our main result is that subjects’ numerical skills can help better assess this tradeoff: the simpler task may be preferred when subjects exhibit low numeracy as it generates less noisy behavior but similar predictive accuracy than the more complex task; conversely, for subjects with higher numerical skills, the greater predictive accuracy of the more complex task more than outweighs the larger noise. We explore timeconsistency and preference heterogeneity under the two methods and provide methodological suggestions for future work.

Suggested Citation

Dave, Chetan and Eckel, Catherine C. and Johnson, Cathleen Amanda and Rojas, Christian, Eliciting Risk Preferences: When is Simple Better? (December 1, 2008). Available at SSRN: https://ssrn.com/abstract=1883787 or http://dx.doi.org/10.2139/ssrn.1883787

Chetan Dave

New York University ( email )

Department of Economics
19 W. 4th Street, 6FL
New York, NY 10012
United States

Catherine C. Eckel (Contact Author)

Texas A&M University ( email )

5201 University Blvd.
College Station, TX 77843-4228
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

Christian Rojas

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
95
Abstract Views
627
rank
272,655
PlumX Metrics