Eliciting Risk Preferences: When is Simple Better?

37 Pages Posted: 13 Jul 2011

See all articles by Chetan Dave

Chetan Dave

University of Alberta - Department of Economics

Catherine C. Eckel

Texas A&M University

Cathleen A. Johnson

Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Arizona, Philosophy, Politics, Economics and Law Program

Christian Rojas

University of Massachusetts Amherst

Date Written: December 1, 2008

Abstract

We study the estimation of risk aversion preferences with experimental data. The focus is on the trade-offs that arise when choosing between two different elicitation methods that have different degrees of difficulty for subjects. We analyze how and when the simpler, but coarser, elicitation method may be preferred to the more complex, but finer, one. Results indicate that the more complex measure has an overall superior predictive accuracy, but its downside is that subjects exhibit noisier behavior; conversely, the simpler measure has the opposite costs and benefits. Our main result is that subjects’ numerical skills can help better assess this tradeoff: the simpler task may be preferred when subjects exhibit low numeracy as it generates less noisy behavior but similar predictive accuracy than the more complex task; conversely, for subjects with higher numerical skills, the greater predictive accuracy of the more complex task more than outweighs the larger noise. We explore timeconsistency and preference heterogeneity under the two methods and provide methodological suggestions for future work.

Suggested Citation

Dave, Chetan and Eckel, Catherine C. and Johnson, Cathleen Amanda and Johnson, Cathleen Amanda and Rojas, Christian, Eliciting Risk Preferences: When is Simple Better? (December 1, 2008). Available at SSRN: https://ssrn.com/abstract=1883787 or http://dx.doi.org/10.2139/ssrn.1883787

Chetan Dave

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Catherine C. Eckel (Contact Author)

Texas A&M University ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

Cathleen Amanda Johnson

Center for Interuniversity Research and Analysis on Organization (CIRANO)

Montreal, Quebec H3C 3J7
Canada

University of Arizona, Philosophy, Politics, Economics and Law Program ( email )

Social and Behavioral Sciences
Tucson, AZ 85721-0108
United States

Christian Rojas

University of Massachusetts Amherst ( email )

205 B Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003
United States

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