Small Stakes Risk Aversion in the Laboratory: A Reconsideration

Harrison, G.W.; Lau, M.; Ross, D.; Swarthout, J.T.

Abstract

Evidence of risk aversion in laboratory settings over small stakes leads to a priori implausible levels of risk aversion over large stakes under certain assumptions. One core assumption in statements of this calibration puzzle is that small-stakes risk aversion is observed over all levels of wealth, or over a “sufficiently large” range of wealth. Although this assumption is viewed as self-evident from the vast experimental literature showing risk aversion over laboratory stakes, it actually requires that lab wealth be varied for a given subject as one evaluates the risk attitudes of the subject. We consider evidence from a simple design that tests this assumption, and find that the assumption is strikingly rejected for a large sample of subjects from a population of college students. We conclude that the implausible predictions that flow from these assumptions do not apply to one specialized population widely used to study economic behavior in laboratory experiments.

Citation

Harrison, G., Lau, M., Ross, D., & Swarthout, J. (2017). Small Stakes Risk Aversion in the Laboratory: A Reconsideration. Economics Letters, 160, 24-28. https://doi.org/10.1016/j.econlet.2017.08.003

• Journal Article Type: Article
• Acceptance Date: Aug 4, 2017
• Online Publication Date: Aug 19, 2017
• Publication Date: Nov 1, 2017
• Deposit Date: Jul 31, 2017
• Publicly Available Date: Feb 19, 2019
• Journal: Economics Letters
• Print ISSN: 0165-1765
• Electronic ISSN: 1873-7374
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 160
• Pages: 24-28
• DOI: https://doi.org/10.1016/j.econlet.2017.08.003
• Public URL: https://durham-repository.worktribe.com/output/1372096