Are Collective Risk Preferences More Risk Neutral than Individual Risk Preferences? An Experiment in Small Groups

50 Pages Posted: 29 Dec 2017 Last revised: 17 May 2019

See all articles by Nobuyuki Ito

Nobuyuki Ito

Niigata University - Faculty of Economics

Date Written: May 16, 2019

Abstract

In this study, we investigate the changes in risk attitudes and risk perceptions that occur while collective risk preferences are formed. Data on risk attitudes and risk perceptions were collected in lottery choice experiments. The subjects participated in individual choice tasks and group choice tasks. The observed choice data are analyzed by using a structural estimation approach. The behavioral models used for structural estimation are based on expected utility theory (EUT), prospect theory (PT) and model parameters. The superiority of the models is also examined. The results of the structural estimations show that 1) overall, the PT specifications are superior to the EUT specifications, 2) regardless of whether the participants are male or female, there are no significant disparities between the subjective and objective risks in the individual and group decisions, 3) risk attitudes become more risk-loving (and closer to risk neutral) during the process of forming collective risk preferences, 4) the switching phenomena that occur during Holt and Laury’s experiment with lottery pairs can be explained only by changes in risk attitudes, which are independent of the riskiness of lotteries, and 5) these results are obtained regardless of the majority or the unanimous agreement rules.

Keywords: structural estimation, group decisions, collective risk preference, expected utility theory, prospect theory, lottery choice experiment

JEL Classification: C87, C91, C92, D81

Suggested Citation

Ito, Nobuyuki, Are Collective Risk Preferences More Risk Neutral than Individual Risk Preferences? An Experiment in Small Groups (May 16, 2019). Available at SSRN: https://ssrn.com/abstract=3093859 or http://dx.doi.org/10.2139/ssrn.3093859

Nobuyuki Ito (Contact Author)

Niigata University - Faculty of Economics

8050 Ikarashi 2-no-cho
Nishi-ku
Niigata, 9502181
Japan

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