How Serious is the Measurement-Error Problem in a Popular Risk-Aversion Task?

Perez Fabien, Guillaume Hollard, Radu Vranceanu and Dubart Delphine ()
Additional contact information
Perez Fabien: ENSAE
Dubart Delphine: ESSEC Research Center, ESSEC Business School, Postal: ESSEC Research Center, BP 105, 95021 Cergy, France

No WP1911, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: This paper uses the test/retest data from the Holt and Laury (2002) experiment to provide estimates of the measurement error in this popular risk-aversion task. Maximum likelihood estimation suggests that the variance of the measurement error is approximately equal to the variance of the number of safe choices. Simulations confirm that the coefficient on the risk measure in univariate OLS regressions is approximately half of its true value. Unlike measurement error, the discrete transformation of continuous riskaversion is not a major issue. We discuss the merits of a number of different solutions: increasing the number of observations, IV and the ORIV method developed by Gillen et al. (2019).

Keywords: ORIV; Experiments; Measurement error; Risk-aversion; Test/retest (search for similar items in EconPapers)
JEL-codes: C18 C26 C91 D81 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2019-09
New Economics Papers: this item is included in nep-cwa, nep-exp, nep-ore, nep-rmg and nep-upt
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Working Paper: How Serious is the Measurement-Error Problem in a Popular Risk-Aversion Task? (2019)
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