Allais for the Poor: Relations to Ability, Information Processing and Risk Attitudes

36 Pages Posted: 10 Mar 2017

See all articles by Tabea Herrmann

Tabea Herrmann

Leibniz Universität Hannover

Olaf Hübler

University of Hannover; IZA Institute of Labor Economics

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Ulrich Schmidt

University of Kiel - Institute of Economics

Date Written: March 2017

Abstract

This paper complements evidence on the Allais paradox from advanced countries and educated people by a novel investigation in a poor rural area. The share of Allais-type behavior is indeed high and related to characteristics of “lacking ability”, such as poor education, unemployment, and little financial sophistication. Based on prospective reference theory, we extend these characteristics by biased processing of probabilistic information. Finally, we reveal that Allais-type behavior is linked to risk-related characteristics, such as risk tolerance and optimism. This indicates a potential problem as exactly the more dynamic among the poor tend to make inconsistent decisions under uncertainty.

Keywords: Field experiments, Allais paradox, socio-demographic characteristics, prospective reference theory, first order stochastic dominance, risk attitude, optimism

JEL Classification: D81; D3; O10

Suggested Citation

Herrmann, Tabea and Hübler, Olaf and Menkhoff, Lukas and Schmidt, Ulrich, Allais for the Poor: Relations to Ability, Information Processing and Risk Attitudes (March 2017). DIW Berlin Discussion Paper No. 1645. Available at SSRN: https://ssrn.com/abstract=2930879 or http://dx.doi.org/10.2139/ssrn.2930879

Tabea Herrmann

Leibniz Universität Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

Olaf Hübler

University of Hannover ( email )

Institute of Quantitative Economic Research
D-30167 Hannover
Germany
+49 511 762 4794 (Phone)
+49 511 762 3923 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Lukas Menkhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Ulrich Schmidt

University of Kiel - Institute of Economics ( email )

Olshausenstrasse 40
24098 Kiel, 24098
Germany

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