A Theoretical and Experimental Appraisal of Four Risk Elicitation Methods
Experimental Economics
We run an experiment to compare for widely used risk elicitation tasks, in order to find which one better represents preferences, why do their estimates differ, and how can these differences be reconciled. We find large differences in elicited risk attitudes. We find that part of the difference is due to the mechanics of the task and how choices map into risk attitude coefficients, but correcting for those still leaves a large gap among tasks. This paper won the Best Paper of The Year published in Experimental Economics award in 2015.
Abstract
The paper performs an in-depth comparison of four incentivised risk elicitation tasks. We show by means of a simulation exercise that part of the often observed heterogeneity of estimates across tasks is due to task-specific measurement error induced by the mere mechanics of the tasks. We run a replication experiment in a homogeneous subject pool using a between subjects one-shot design. Results shows that the task estimates vary over and above what can be explained by the simulations. We investigate the possibility the tasks elicit different types of preferences, rather than simply provide a different measure of the same preferences. In particular, the availability of a riskless alternative plays a prominent role helping to explain part of the differences in the estimated preferences.