Risk Aversion and Incentive Effects: Comment
UCF Economics Working Paper No. 03-19
8 Pages Posted: 20 Apr 2005
Date Written: October 2004
Holt and Laury, AER 2002, develop an experimental design to determine the risk aversion of an individual. They use their observations to argue that increased incentives appear to change risk attitudes, leading to greater risk aversion. However, their main treatment, the effects of scaling up the stakes of the lottery choice task, is confounded by a simple order effect. We extend their design to test for these order effects, and show that they are indeed significant. The size of the stakes still affects measured risk aversion, but the effect is only one-half of the apparent effect when one does not control for task order.
Keywords: Risk aversion, experiments
JEL Classification: D81, C91
Suggested Citation: Suggested Citation