Estimating Risk Preferences in the Field

We survey the literature on estimating risk preferences using field data. We concentrate our attention on studies in which risk preferences are the focal object and estimating their structure is the core enterprise. We review a number of models of risk preferences—including both expected utility (EU) theory and non-EU models—that have been estimated using field data, and we highlight issues related to identification and estimation of such models using field data. We then survey the literature, giving separate treatment to research that uses individual-level data (e.g., property insurance data) and research that uses aggregate data (e.g., betting market data). We conclude by discussing directions for future research

The Nature of Risk Preferences: Evidence from Insurance Choices

The authors use data on insurance deductible choices to estimate a structural model of risky choice that incorporates standard risk aversion (diminishing marginal utility for wealth) and probability distortions. They find that probability distortions--characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes--play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. They demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting

Distinguishing Probability Weighting from Risk Misperceptions in Field Data

The paper outlines a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data

Distinguishing Probability Weighting from Risk Misperceptions in Field Data

The paper outlines a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data

Dread sensitivity in decisions about real and imagined electrical shocks does not vary by age

Previous research has found age differences in intertemporal choices that involve trade-offs among events or outcomes that occur at different points in time, but these findings were mostly limited to hypothetical financial and consumer choices. We examined whether age effects extend to unpleasant physical experiences that elicit states of dread which lead participants to speed up the outcomes just to get them over with. We asked participants of different ages to choose among electrical shocks that varied in timing and intensity. We also assessed affective responses as a potential mechanism behind age effects and considered other potential covariates. In Study 1, the choice task involved real outcomes and the sample consisted of younger and older adults. In Study 2, the choice task was hypothetical and the sample was an adult life span sample. Across both studies, there was no evidence of age differences in the preferred timing of shocks. Instead, dread-sensitive choices were associated with higher conscientiousness. Age effects in dread-sensitive choices remained nonsignificant even after controlling for a range of age-associated covariates. We discuss possible explanations for the lack of age effects and consider implications for applied and clinical settings