Controls for Risk Aversion in the Laboratory

UCF Economics Working Paper No. 05-05

29 Pages Posted: 18 Apr 2005

See all articles by Glenn W. Harrison

Glenn W. Harrison

Georgia State University - J. Mack Robinson College of Business

Eric Johnson

University of South Carolina - Moore School of Business - Department of Economics

Melayne Morgan McInnes

University of South Carolina - Darla Moore School of Business

E. Elisabet Rutström

University of Central Florida - College of Business Administration

Date Written: 2005

Abstract

Experiments are being used to generate measures of characteristics of individuals that need to be controlled for economic analyses. Examples include the measurement of risk aversion, inequality aversion, and trust. Imprecision in measuring those characteristics may lead to misleading conclusions in tests of the underlying theory of choice. We consider the need to control for risk aversion in tests of expected utility theory. We show that the conclusions drawn about the choice theory may be sensitive to statistical imprecision in measuring risk aversion. We show that the use of instruments to estimate risk attitudes does not allow sufficiently precise estimates of risk aversion for these purposes. Given existing laboratory technology and statistical models, we conclude that controls for risk aversion should be implemented using within-subjects, revealed preference designs that utilize the direct, raw responses of the subject. These statistical issues are generally applicable to a wide variety of experimental situations.

Keywords: Expected utility theory, risk aversion, experiments

JEL Classification: D81, C91

Suggested Citation

Harrison, Glenn William and Johnson, Eric and McInnes, Melayne Morgan and Rutstrom, Elisabet, Controls for Risk Aversion in the Laboratory (2005). UCF Economics Working Paper No. 05-05, Available at SSRN: https://ssrn.com/abstract=698941 or http://dx.doi.org/10.2139/ssrn.698941

Glenn William Harrison (Contact Author)

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
407-489-3088 (Phone)
253-830-7636 (Fax)

HOME PAGE: http://www.cear.gsu.edu/

Eric Johnson

University of South Carolina - Moore School of Business - Department of Economics ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

Melayne Morgan McInnes

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Elisabet Rutstrom

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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