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Small stakes risk aversion in the laboratory: A reconsideration

Glenn Harrison (), Morten Lau, Don Ross () and J. Todd Swarthout

Economics Letters, 2017, vol. 160, issue C, 24-28

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.

Keywords: Risk aversion; Calibration puzzle; Laboratory experiments (search for similar items in EconPapers)
JEL-codes: D81 D03 C91 (search for similar items in EconPapers)
Date: 2017
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