Inconsistent Choices in Lottery Experiments: Evidence from Rwanda

Sarah Jacobson and Ragan Petrie

No 2007-03, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

Abstract: Lottery experiments have been performed in many contexts to test theories of risk aversion and to measure risk preferences. People are typically offered a series of lotteries with increasing expected payoffs and variances. A person with a concave utility function should switch from risky bets to safer bets at some point and never switch back. Switching back implies preferences inconsistent with a concave utility function. Our experiment, conducted with a population of adults in Rwanda, presents respondents with a series of binary-choice lotteries over gains and losses. We observe that 54-55% of subjects made at least one inconsistent choice over gains or losses, and 7-13% made at least two inconsistent choices. This holds for both hypothetical and real lottery payoffs. Inconsistent choices were less common when stakes were higher, and women are more likely to be inconsistent. While risk aversion alone is not correlated with actual economic outcomes, such as membership in savings (tontines) and insurance groups and holding a larger number of bank accounts, inconsistency is.

Pages: 26
Date: 2007-04
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-mfd and nep-upt
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