Changing the Probability versus Changing the Reward

David Bruner

No 09-04, Working Papers from Department of Economics, Appalachian State University

Abstract: There are two means of changing the expected value of a risk: changing the probability of a reward or changing the reward. Theoretically, the former produces a greater change in expected utility for risk averse agents. This paper uses two formats of a risk preference elicitation mechanism under two decision frames to test this hypothesis. After controlling for decision error, probability weighting, and order effects, subjects, on average, are slightly risk averse and prefer an increase in the expected value of a risk due to increasing the probability over a compensated increase in the reward. There is substantial across-format inconsistency but very little within-format inconsistency at the individual level. Key Words: risk, uncertainty, experiments

JEL-codes: C91 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-upt
Date: Written
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