Abstract
I modify the skewed lottery task introduced by Grossman and Eckel (Journal of Risk and Uncertainty, 51(3), 2015) to eliminate the effects of loss aversion as a potentially confounding explanation for the strong preference for skewed lotteries and increase in risk taking that they observe when skew increases. I also test for framing effects by reversing the order of the task. Like previous studies, a majority of subjects prefer skewed lotteries relative to those with no skew, but this preference is dampened when loss aversion is eliminated as a confound and the order of the task is reverse. More importantly, introducing skew is unlikely to cause an increase in risk taking in this task.
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Notes
Outcomes are rounded to the nearest nickel to reduce cognitive effort and to reduce subject suspicions that a trick may be hiding in more complex numbers.
GE2015 did not allow subjects to select a different lottery in the same row as the current selection. That is, subjects could not alter the riskiness of their choices without increasing skew. Subject’s choices were not restricted in this way in this experiment. Any presented lottery was available for selection in each round.
The median subject in this experiment chose Option D, which implies a CRRA coefficient between 0.37 and 0.53, and the average number of safe choices made in the HL MPL is typically 5 or 6, which corresponds to CRRA bounds between 0.15 and 0.68.
A total of 160 subjects completed the entire experiment, but the Round 3 choices for the first eight subjects were lost due to a coding error. Subjects earned an average of $32.94 for the entire experiment, which took about an hour to complete.
Round-by-round distribution of lottery choices by risk and skew are shown in Table 8 in the Appendix.
An ordered probit model in which the dependent variable is the skew of the Round 3 selection of the subject also indicates that there is a significant order effect.
Both percentages are more than 10 percentage points less than GE2015 and are statistically significantly different from the corresponding percentages in GE2015 (p-value= 0.058 from test that first proportion equals 0.376 and p-value= 0.066 from test that second proportion equals 0.427).
The mean of Difrisk equals the difference between mean riskiness in Round 3 and Round 1 shown in Table 5 for each treatment.
Only two subjects spent more than ten minutes on this task, including instructions, and the average was less than five minutes.
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Acknowledgements
This research is partially funded by a University of Montana Small Grant. I am especially grateful for helpful comments and suggestions from Doug Dalenberg. I also thank Lynzee Lee, Mason Gedlaman, and Aaron Nicholson for assistance with the administration of the experiment. All errors are my own.
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Appendix: A
Appendix: A
1.1 A.1 Oral instructions
(Read aloud before experiment starts to subjects)
Thank you for participating in this experiment. Your participation will allow us to explore questions that economists have about individual decision making, preferences, and cognitive ability.
This experiment will have multiple sections. In some sections, you will have the opportunity to make choices and answer questions that may affect your payment. Please read the instructions carefully to ensure that you understand whether, and how, your choices in a particular section will affect your payment.
Additionally, some of the sections will ask you to make choices that reveal your attitudes or preferences. There are no correct answers for these choices. Other sections will ask you questions that do have a correct answer. Please do your best to answer these questions correctly.
After you have completed the experiment, you will reach a page that displays your total payoff for participation in the experiment today. This page asks you to stop and raise your hand so that we can verify your payoff, please quietly raise your hand when you reach this page and we will verify payment.
You will be paid in cash today before you leave. Everyone here will start the experiment with a $6 show-up payment. During Section 2 of the experiment, you will have the opportunity to “wager” some or all of that $6 in order to have a chance at getting a much larger payoff. Someone who chooses this option could lose some or all of his or her show-up payment. However, you are not required to choose an option that puts your show-up payment at risk. Moreover, other sections of the experiment will allow you to have the chance to receive money. As a result, everyone here will be paid at least $0.30 at the end of the experiment, no matter what happens.
If you decide to leave early, you may do so. If you do leave early, you will be allowed to keep the $6 show-up payment, but you will forfeit any experimental earnings.
We understand that you may have questions, but it is important that we maintain the integrity of the experiment by minimizing talking and other disruptions. If you have any questions before or during the experiment, please write it down on the card next to your computer, raise your hand, and wait until one of us comes over to your computer terminal. If it is a question that can be answered without compromising the integrity of the experiment, then we will do so.
Finally, we ask that you do not discuss this experiment with anyone who may also participate in this experiment. Thank you.
1.2 A.2 Lottery choice distribution by round
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Taylor, M.P. Liking the long-shot … but just as a friend. J Risk Uncertain 61, 245–261 (2020). https://doi.org/10.1007/s11166-020-09342-5
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DOI: https://doi.org/10.1007/s11166-020-09342-5