Detecting Heterogeneous Risk Attitudes with Mixed Gambles

40 Pages Posted: 8 Aug 2012 Last revised: 11 Apr 2014

See all articles by Luís Santos-Pinto

Luís Santos-Pinto

University of Lausanne

Adrian Bruhin

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

José Mata

Nova School of Business and Economics

Thomas B. Astebro

HEC Paris - Economics and Decision Sciences

Date Written: March 28, 2014

Abstract

We propose a task for eliciting attitudes towards risk that is close to real world risky decisions which typically involve gains and losses. The task consists of accepting or rejecting gambles that provide a gain with probability p and a loss with probability 1 − p. We employ finite mixture models to uncover heterogeneity in risk preferences and find that (i) behavior is heterogeneous, with slightly less than one half of the subjects behaving as expected utility maximizers, (ii) for the others, reference-dependent models perform better than those where subjects derive utility from final outcomes, (iii) models with sign dependent decision weights perform better than those without, and (iv) there is no evidence for loss aversion. The procedure is sufficiently simple so that it can be easily used in field or lab experiments where risk elicitation is not the main experiment.

Keywords: Individual risk taking behavior; latent heterogeneity; finite mixture models; reference-dependence; loss aversion

JEL Classification: C91, D81

Suggested Citation

Santos-Pinto, Luis P. and Bruhin, Adrian and Mata, José and Astebro, Thomas B., Detecting Heterogeneous Risk Attitudes with Mixed Gambles (March 28, 2014). HEC Paris Research Paper No. SPE-2014-1042, Available at SSRN: https://ssrn.com/abstract=2125956 or http://dx.doi.org/10.2139/ssrn.2125956

Luis P. Santos-Pinto

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

Adrian Bruhin

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

José Mata

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Thomas B. Astebro (Contact Author)

HEC Paris - Economics and Decision Sciences ( email )

Jouy-en-Josas Cedex, 78351
France

HOME PAGE: http://www.hec.edu/Faculty-Research/Faculty-Directory/ASTEBRO-Thomas

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