EXPLORING THE CONSISTENCY OF HIGHER ORDER RISK PREFERENCES

This study measures higher order risk preferences and their consistency. We explore the role of country differences, the variation of stakes, and the framing of lotteries. We observe a robust dichotomous pattern of choice behavior in China, the United States, and Germany. The majority of choices are...

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Bibliographic Details
Published inInternational economic review (Philadelphia) Vol. 61; no. 1; pp. 283 - 320
Main Authors Haering, Alexander, Heinrich, Timo, Mayrhofer, Thomas
Format Journal Article
LanguageEnglish
Published Philadelphia Wiley 01.02.2020
Blackwell Publishing Ltd
Subjects
Aversion
Behavior
Economic models
Economic theory
Lotteries
Preferences
Risk
Risk behavior
Risk preferences
United States > US
China
Germany
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Summary:This study measures higher order risk preferences and their consistency. We explore the role of country differences, the variation of stakes, and the framing of lotteries. We observe a robust dichotomous pattern of choice behavior in China, the United States, and Germany. The majority of choices are consistent with mixed risk aversion or mixed risk-loving behavior. We also find this pattern after a 10-fold increase in the stakes. Finally, our results reveal that this pattern is strengthened if the lotteries are displayed in compound instead of reduced form. In a follow-up study, we explore potential explanations for this framing effect.
Bibliography:We thank the co‐editor Masaki Aoyagi and two anonymous referees for very helpful comments. We are also grateful to Han Bleichrodt, Jeannette Brosig‐Koch, Louis Eeckhoudt, Glenn Harrison, Heike Hennig‐Schmidt, Zwetelina Iliewa, Johanna Kokot, Gijs van de Kuilen, Isabel Marcin, Peter Martinsson, Sonja Opper, Richard Peter, Hendrik Schmitz, Jan Siebert, Stefan Traub, Stefan Trautmann, and Toshio Yamagishi for their valuable feedback. We have also benefited from the comments of seminar participants at the Ruhr University Bochum, the Helmut Schmidt University Hamburg, IE Business School Madrid, and the University of Paderborn, as well as those of conference participants at the GfeW Annual Meeting 2015 in Hamburg, the CEAR/MRIC Behavioral Insurance Workshop 2015 in Atlanta, the Experimental Finance conference 2016 in Mannheim, the FUR conference 2016 at the University of Warwick, the INFORMS Annual Meeting 2016 in Nashville, the 6th ACCER International Workshop 2017 in Duisburg, the Tagung des Sozialwissenschaftlichen Ausschusses 2018 in Essen, and the International ESA Meeting 2018 in Berlin. Furthermore, we thank Christine E. Looser, Haiying Qin, Weijing Le, Chaoliang Yang, and Guanzhong Yang for their support in organizing the experiments. Constantin Carstens, Johanna Rosebrock, Franziska Then, and Stephanie Zimmer provided excellent research assistance. Financial support from the BMBF through the IN‐EAST School of Advanced Studies (Grant No. 01UC1304) is gratefully acknowledged.
ISSN:0020-6598
1468-2354
DOI:10.1111/iere.12424