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Endowment Effects and Loss Aversion in the Risky Investment Game

Stein Holden () and Mesfin Tilahun ()
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Mesfin Tilahun: Centre for Land Tenure Studies, Norwegian University of Life Sciences, Postal: Centre for Land Tenure Studies, Norwegian University of Life Sciences, P.O. Box 5003, NO-1432 Aas, Norway

No 1/20, CLTS Working Papers from Norwegian University of Life Sciences, Centre for Land Tenure Studies

Abstract: The risky investment game of Gneezy and Potters (1997) has been a popular tool used to estimate risk tolerance and myopic loss aversion. We have assessed whether a simple one-shot version of this game that is attractive as a simple tool to elicit risk tolerance among respondents with limited education, can lead to biased estimates of risk aversion due to endowment effects. We use a field experiment with a pool of young business group members with limited education to test for the potential bias associated with the initial endowment allocation. We find a highly significant endowment effect which may explain low investment levels and exaggerated measures of risk aversion where this game has been used to estimate risk aversion. We develop and test a more balanced version of the risk investment game and demonstrate that it gives less bias due to endowment effects than the standard design and a full risk design that creates an endowment effect in the opposite direction, indicating that loss aversion may not be the primary cause of the endowment effect.

Keywords: Endowment effect; loss aversion; gender difference; risky investment game; field experiment; Ethiopia. (search for similar items in EconPapers)
JEL-codes: C93 D91 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2020-01-16
New Economics Papers: this item is included in nep-exp
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