Investigating Risky Choices Over Losses Using Experimental Data

• Published in: Journal of risk and uncertainty Vol. 31; no. 2; pp. 187 - 215
• Main Authors: MASON, CHARLES F., SHOGREN, JASON F., SETTLE, CHAD, LIST, JOHN A.
• Format: Journal Article
• Language: English
• Published: New York Spring Science + Business Media 01.09.2005; Springer Nature B.V
• Subjects: Decision making; Economic models; Economic uncertainty; Economic utility; Economics; Environmental impact; Expected utility; Experimental data; Experimental economics; Experiments; Indifference curves; Linear regression; Lotteries; Mathematical independent variables; Microeconomics; Preferences; Probability; Public policy; Risk; Risk reduction; Statistical methods; Studies; Uncertainty; Utility functions; Utility models; Willingness to pay
• ISSN: 0895-5646; 1573-0476
• DOI: 10.1007/s11166-005-3554-7

We conduct a battery of experiments in which agents make choices from several pairs of all-loss-lotteries. Using these choices, we estimate a representation of individual preferences over lotteries. We find statistically and economically significant departures from expected utility maximization for many subjects. We also estimate a preference representation based on summary statistics for behavior in the population of subjects, and again find departures from expected utility maximization. Our results suggest that public policies based on an expected utility approach could significantly underestimate preferences and willingness to pay for risk reduction.