The gain-loss asymmetry and single-self preferences

Kahneman and Tversky asserted a fundamental asymmetry between gains and losses, namely a “reflection effect” which occurs when an individual prefers a sure gain of $pz to an uncertain gain of$ z with probability p, while preferring an uncertain loss of $z with probability p to a certain loss of$ pz. We focus on this class of choices (actuarially fair), and explore the extent to which the reflection effect, understood as occurring at a range of wealth levels, is compatible with single-self preferences. We decompose the reflection effect into two components, a “probability switch” effect, which is compatible with single-self preferences, and a “translation effect,” which is not. To argue the first point, we analyze two classes of single-self, nonexpected utility preferences, which we label “homothetic” and “weakly homothetic.” In both cases, we characterize the switch effect as well as the dependence of risk attitudes on wealth. We also discuss two types of utility functions of a form reminiscent of expected utility but with distorted probabilities. Type I always distorts the probability of the worst outcome downwards, yielding attraction to small risks for all probabilities. Type II distorts low probabilities upwards, and high probabilities downwards, implying risk aversion when the probability of the worst outcome is low. By combining homothetic or weak homothetic preferences with Type I or Type II distortion functions, we present four explicit examples: All four display a switch effect and, hence, a form of reflection effect consistent a single self preferences.Reflection, gains, losses, experiments, risk attitude, Leex

Does risk aversion or attraction depend on income? An experiment

Does risk attitude (aversion or attraction) vary with the level of the income at risk? About half of our subjects chose to insure all levels, whereas another half chose instead not to insure low levels, but to insure high levels.Experimental economics, risk aversion, risk attraction, income risks, Leex

Do the Wealthy Risk More Money? An Experimental Comparison.

Are poor people more or less likely to take money risks than wealthy folks? We find that risk attraction is more prevalent among the wealthy when the amounts of money at risk are small (not surprising, since ten dollars is a smaller amount for a wealthy person than for a poor one), but, interestingly, for the larger amounts of money at risk the fraction of the nonwealthy displaying risk attraction exceeds that of the wealthy. We also replicate our previous finding that many people display risk attraction for small money amounts, but risk aversion for large ones. We argue that preferences yielding “risk attraction for small money amounts, together with risk aversion for larger amounts, at all levels of wealth,” while contradicting the expected utility hypothesis, may be well-defined, independently of reference points, on the choice space.risk attraction; risk aversion; wealth; experiments

Risk aversion and embedding bias

In Selten (1967) “Strategy Method,” the second mover in the game submits a complete strategy. This basic idea has been exported to nonstrategic experiments, where a participant reports a complete list of contingent decisions, one for each situation or state in a given sequence, out of which one and only one state, randomly selected, will be implemented. In general, the method raises the following concern. If S0 and S1 are two different sequences of states, and state s is in both S0 and S1, would the participant make the same decision in state s when confronted with S0 as when confronted with S1? If not, the experimental results are suspect of suffering from an “embedding bias.” We check for embedding biases in elicitation methods of Charles Holt and Susan Laury (Laury and Holt, 2000, and Holt and Laury, 2002), and of the present authors (Bosch-Domènech and Silvestre, 1999, 2002, 2006a, b) by appropriately chosen replications of the original experiments. We find no evidence of embedding bias in our work. But in Holt and Laury’s method participants tend to switch earlier to the riskier option when later pairs of lotteries are eliminated from the sequence, suggesting the presence of some embedding bias.Embedding bias, strategy method, Holt, Laury, Risk Attraction, Risk Aversion, Experiments, Leex

Arrisquem més diners els rics? Una comparació experimental

La incertesa apareix en diferents situacions al llarg de la vida. No obstant això, dirigir-la no és una tasca fàcil. En aquesta investigació experimental es trobaran resultats que mostraran diferents accions preses sota situacions de risc. El risc es palesa en qualsevol context en què es treballi. Per això, en aquesta recerca es volen estudiar els actes de la gent en diferents situacions. D'altra banda, la dificultat per a preveure successos aleatoris també s'estudia utilitzant el mètode experimental. El que més s'estudia en aquest article són els factors que influeixen en l'actitud de la gent davant del risc, així com la manera en què varia en funció del nivell assumit.Uncertainty appears in many different life situations and people find it difficult to manage it. This experimental research study presents some behavioural results of diverse actions in risk situations. Risk is involved in any framework in which one works and that is why this study focused on testing people to observe their acts in different situations. The difficulty of predicting random success is studied by the experimental method, allowing control of the conditions under which decisions are made. This paper primarily focuses on the factors that influence people’s attitudes to risk and their individual behaviour according to the amount of risk involved

On the role of non-equilibrium focal points as coordination devices

Considering a pure coordination game with a large number of equivalent equilibria, we argue, first, that a focal point that is itself not a Nash equilibrium and is Pareto dominated by all Nash equilibria, may attract the players' choices. Second, we argue that such a non-equilibrium focal point may act as an equilibrium selection device that the players use to coordinate on a closely related small subset of Nash equilibria. We present theoretical as well as experimental support for these two new roles of focal points as coordination devices.Coordination game, Focal point, Nash equilibrium, Equilibrium selection, Coordination device, LeeX

Imitation of succesful behavior in Cournot markets

In an experimental standard Cournot Oligopoly we test the importance of models of behavior characterized by imitation of succesful behavior. We find that the players appear to the rather reluctant to imitate.Oligopoly, cournot, bounded rationality, spite effect, Leex

Evidència experimental sobre l'aversió i l'atracció al risc i les seves conseqüències teòriques i pràctiques

Tendeixen les persones pobres a prendre més o menys riscs monetaris que les persones adinerades? En aquest treball trobem que l'atracció al risc és més habitual entre els rics quan les quantitats de diners en joc són petites (això no és sorprenent, ja que deu dòlars representen una quantitat inferior per a una persona rica que per a una de pobra). Potser és més interessant el fet que, d'altra banda, per a quantitats més grans de diners en joc, la fracció de Pobres que mostren atracció al risc excedeix la dels Rics. També reproduïm el nostre descobriment anterior que molta gent mostra atracció al risc per a petites quantitats de diners, però aversió al risc per a quantitats grans.Are the poor willing to run a greater or lesser monetary risk than the rich? This study finds that, among the wealthy, running risks is more attractive when small amounts of money are involved. It is perhaps of greater interest to study the fact that the proportion of poor people increases when risks involving larger amounts of money are to be run. Previous findings as to the attraction to risk for smaller amounts of money and the aversion to risk for larger amounts are also taken into consideration

Credit cycles in theory and experiment

We test in the laboratory the potential of evolutionary dynamics as predictor of actual behavior. To this end, we propose an asymmetric game -which we interpret as a borrowerlender relation-, study its evolutionary dynamics in a random matching set-up, and tests its predictions. The model provides conditions for the existence of credit markets and credit cycles. The theoretical predictions seem to be good approximations of the experimental results.Cycles, evolutionary dynamics, games, experiments, Leex

Social capabilities in Alzheimer’s patients

Patients with stage-I (very mild and mild) Alzheimer’s disease were asked to participate in a Dictator Game, a type of game in which a subject has to decide how to allocate a certain amount of money between himself and another person. The game enables the experimenter to examine the influence of social norms and social preferences on the decision-making process. When the results of treatments involving Alzheimer’s disease patients were compared with those of identical treatments involving patients with mild cognitive impairment or healthy control subjects, with similar ages and social backgrounds, no statistically significant difference was found. This finding suggests that stage-I Alzheimer’s disease patients may be as capable of making decisions involving social norms and preferences as other individuals of their age. Whatever brain structures are affected by the disease, they do not appear to influence, at this early stage, the neural basis for cooperation-enhancing social interactions.Alzheimer patients, social behavior, dictator games