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We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments. Attitudes to risk are one of the primitives of economics. Individual preferences over risky prospects are taken as given and subjective in all standard economic theory. Turning to the characterization of risk in applied work, however, one observes many restrictive assumptions being used. In many cases individuals are simply assumed to be risk neutral;1 or perhaps to have the same constant absolute or relative aversion to risk.2 Assumptions buy tractability, of course, but at a cost. How plausible are the restrictive assumptions about risk attitudes that are popularly used? If they are not plausible, perhaps there is some way in which one can characterize the distribution of risk attitudes so that it can be used to analyze the implications of relaxing these assumptions. If so, such characterizations will condition inferences about choice behavior under uncertainty, bidding in auctions, and behavior in games.

It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two major types of individuals: In all three data sets, the choices of roughly 80 % of the subjects exhibit sig-nificant deviations from linear probability weighting of varying strength, consistent with prospect theory. 20 % of the subjects weight probabili-ties near linearly and behave essentially as expected value maximizers. Moreover, individuals are cleanly assigned to one type with probabilities close to unity. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.

We analyze the extent to which individuals ’ choices over five employerprovided insurance coverage decisions and one 401(k) investment decision exhibit systematic patterns, as would be implied by a general utility component of risk preferences. We provide evidence consistent with an important domain-general component that operates across all insurance choices. We find a considerably weaker relationship between one’s insurance decisions and 401(k) asset allocation, although this relationship appears larger for more “financially sophisticated ” individuals. Estimates from a stylized coverage choice model suggest that up to 30 percent of our sample makes choices that may be consistent across all 6 domains. (JEL D12, D14, D81, G22, J33) Standard models in many fields of economics—most notably macroeconomics, finance, public finance, and labor economics—generally use a canonical model for decisions under uncertainty, in which individuals (or households) have a single, concave utility function over wealth, which gives rise to context-invariant risk preferences.

We present evidence from laboratory experiments showing that individuals are “last-place averse.” Participants choose gambles with the potential to move them out of last place that they reject when randomly placed in other parts of the distribution. In money-transfer games, those randomly placed in second-to-last place are the least likely to costlessly give money to the player one rank below. Last-place aversion suggests that low-income individuals might oppose redistribution because it could differentially help the group just beneath them. Using survey data, we show that individuals making just above the minimum wage are the most likely to oppose its increase.

allowing us the use of the data. We also thank Marco Castillo, James Cox and Vjollca Sadiraj for helpful comments. Suggestions from an anonymous referee and the editor greatly improved the paper. Abstract: We implement a risk experiment that allows for judgment errors to investigate who makes mistakes and whether it matters. The experiments are conducted with a random sample of the adult population in Rwanda, and data on financial decisions are collected. We find a high degree of inconsistent choices, with over 50 % of the participants making at least one mistake. Importantly, errors are informative. While risk aversion alone does not explain financial decisions, risk aversion and inconsistent choices interact in significant and sensible ways. As we would expect, risk-averse individuals are more likely to belong to a savings group and less likely to take out an informal loan. For those more likely to make mistakes, however, as they become more risk averse, they are less likely to belong to a savings group and more likely to take up informal credit, suggesting that mistakes correlate with less than optimal behavior.

We examine the stability of risk preference within subjects by comparing measures obtained from two elicitation methods, an economics experiment with real monetary rewards and a survey with questions on hypothetical gambles. The survey questions have been validated by numerous empirical studies of investment, insurance demand, smoking and alcohol use, and recent studies have shown the experimental measure is associated with several real-world risky behaviors. For the majority of subjects, we find that risk preferences are not stable across elicitation methods. In interval regression models, subjects ’ risk preference classifications from survey questions on job-based gambles are not associated with risk preference estimates from the experiment. However, we find that risk classifications from inheritance-based gambles are significantly associated with the experimental measure. We identify some subjects for whom risk preference estimates are more strongly correlated across elicitation methods, suggesting that unobserved subject traits like comprehension or effort influence risk preference stability.

Abstract. We develop the concept of virtual experiments and consider their application to environmental policy. A virtual experiment combines insights from virtual reality in computer science, naturalistic decision-making from psychology, and field experiments from economics. The environmental policy applications of interest to us include traditional valuation tasks and less traditional normative decision-making. The methodological objective of virtual experiments is to bridge the gap between the artefactual controls of laboratory experiments and the naturalistic domain of field experiments or direct field studies. This should provide tools for policy analysis that combine the inferential power of replicable

ABSTRACT: In the past decade, it has become increasingly common to use simple laboratory games and decision tasks as a device for measuring both the preferences and understanding of rural populations in the developing world. In this paper, we report the results observed with three distinct risk elicitation mechanisms, using samples drawn from the rural population in Senegal, West Africa. We test the understanding of and the level of meaningful responses to the typical Holt-Laury task, to an adaptation of a simple binary mechanism pioneered by Gneezy and Potters in 1997, and to a non-incentivized willingness-to-risk scale. We find a low level of understanding with the Holt-Laury task and an unlikely-to-be-accurate pattern with the willingness-to-risk question. Our analysis indicates that the simple binary mechanism has substantially more predictive power than does the Holt-Laury mechanism. Our study is a cautionary note regarding utilizing either relatively sophisticated risk-elicitation mechanisms or non-incentivized questions in the rural developing world.