small and large stakes risk aversion implications of concavity calibration for decision theory abstract a growing literature reports the conclusions that a expected utility theory does not provide a plausible theory of risk aversion for both small stakes and large stakes gambles and b this decision theory should be replaced with an alternative theory characterized by loss aversion this paper explains that the arguments in previous literature fail to support these conclusions either concavity calibration has no general implication for expected utility theory or it has problematic implications for all decision theories that involve concave transformations utility or value functions of positive money payoffs which makes loss aversion irrelevant to the argument

behavioural development economics lessons from field labs in the developing world abstract explanations of poverty growth and development depend on the assumptions made about individual preferences and the willingness to engage in strategic behaviour economic experiments especially those conducted in the field have begun to paint a picture of economic agents in developing communities that is at variance with the traditional portrait we review this growing literature with an eye towards preference related experiments conducted in the field we also offer lessons on what development economists might learn from experiments we conclude by sharing our thoughts on how to conduct experiments in the field and then offer a few ideas for future research

risk preferences around the world we present results from a large scale international survey on risk preferences conducted in 53 countries in all countries we find on average an attitude of risk aversion in gains and of risk seeking in losses the degree of risk aversion shows significant cross country differences moreover risk attitudes in our sample depend not only on economic conditions but also on cultural factors as measured by the hofstede dimensions individualism and uncertainty avoidance the data may also serve as an interesting starting point for further research on cultural differences in behavioral economics data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1869 this paper was accepted by peter wakker decision analysis

empirical estimation and use of risk preferences discussion in 1976 a number of people present today attended a conference in mexico which has since then 1978 resulted in a state of the arts volume edited by roumasset boussard and singh on risk uncertainty and agricultural development the papers presented today convey the feeling that since that time there has been little progress in measuring risk aversion or in discriminating between alternative theories of behavior under risk i will argue that this is because the papers concentrate on approaches to measurement of risk aversion and testing of theories which hold little promise of fast progress please excuse that i will be somewhat partisan in the remarks and rely heavily on studies with which i have been involved i know them best

the impact of replacement cost disclosure on security prices new evidence abstract a number of studies have tested for information content in the asr 190 disclosure by comparing the conditional and unconditional distribution of abnormal security returns around the time of disclosure since no differences were observed it was concluded that asr 190 had no information content the study reported below performs a similar test by estimating the regression function of the conditional distribution of abnormal returns this test procedure controls for the information content in contemporaneous historical cost disclosure and uses a conditioning variable not considered in earlier tests it finds statistically significant stock price effects however because most of the effects appear to precede the official announcement date by several months it is unclear whether stock prices were responding to the leakage of the information content of asr 190 prior to disclosure to private production of information contained in asr 190 or to a variable omitted from the study which happens to be correlated with replacement costs

electoral campaign financing the role of public contributions and party ideology this article analyzes the effects of public financing of electoral campaigns on policies announced by ideologically oriented parties subject to pre electoral lobbying parties ideologies make politicians announce divergent platforms even though it means losing some votes divergent platforms in turn make lobbies actually contribute to parties electoral campaigns the announced platforms are biased in favor of the parties ideology and interest groups preferred policies finally increasing public financing of electoral campaigns may generate unequal electoral competition and may significantly raise the chances of one party becoming hegemonic wiping out party competition in the long run

the common consequence effect testing a unified explanation of recent mixed evidence abstract the common consequence effect is perhaps the most investigated violation of expected utility theory and yet no single generalised expected utility model convincingly organises the experimental data this paper reports a test of a modified version of expected cardinality specific utility theory with boundary effects neilson w s 1992 economics letters 39 275 278 which can explain some recent mixed evidence without recourse to subjective probability weighting models the results do not convincingly support the boundary effect hypothesis and neither support the more usual probability weighting arguments but do indicate instability in preferences largely consistent with event splitting effects

health insurance choice and risk preferences under cumulative prospect theory an experiment we investigate how consumers choose insurance contracts when using a measure of decision quality based on individual risk preferences for this we use a laboratory experiment with a sequential design first subjects face insurance choices then we elicit risk preferences allowing for different latent decision making theories i e cumulative prospect theory and expected utility theory we find that the vast majority are cumulative prospect theory types analyzing whether subjects choose contracts consistent with their risk preferences we find that about 14 of all participants show inconsistent behavior and low decision quality yet the majority shows consistent behavior and good decision quality our results suggest that one explanation for inconsistent choices is the application of heuristics

incorporating a stochastic element into decision theories abstract recent papers by harless and camerer 1994 and hey and orme 1994 have employed two rather different models of errors in decision making under uncertainty the present paper develops a third approach and shows how different stochastic specifications of the same deterministic core theory may generate very different and sometimes surprising hypotheses

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

observing violations of transitivity by experimental methods the preference reversal phenomenon is usually interpreted as evidence of nontransitivity of preference but has also been explained as the result of the difference between individuals responses to choice and valuation problems the devices used by experimenters to elicit valuations and the random lottery selection incentive system this paper reports an experiment designed so that none of these factors could generate systematic nontransitivities yet systematic violations of transitivity were still found the pattern of violation was analogous with that found in previous preference reversal experiments and is consistent with regret theory copyright 1991 by the econometric society

neoclassical theory versus prospect theory evidence from the marketplace several experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level these results which clearly contradict closely held economic doctrines have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory e g prospect theory which invokes psychological effects this paper pits neoclassical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well functioning marketplace the pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers but consumers with intense market experience behave largely in accordance with neoclassical predictions moreover the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered this transference of behavior across domains has important implications in both a positive and normative sense

experimental investigations of errors in decision making under risk abstract many if not all of the recent theories of decision making under risk that have been developed in the light of experimentally observed violations of expected utility theory are essentially deterministic in nature yet it is clear that actual decision making contains a random or error component this paper surveys the assumptions that have been employed in previous analyses of such experimental data and tries to find better explanations both from an economic and an econometrics point of view of such errors hopefully such work will lead to a unified theory in which the stochastic component is an integral part

risk sharing commitment and information an experimental analysis this paper describes and analyzes the results of a unique field experiment especially designed to test the eects of the level of commitment and information available to individuals when sharing risk we find that limiting exogenously provided commitment is associated with less risk sharing while limiting information on defections can be associated with more risk sharing these results can be understood by distinguishing between intrinsic and extrinsic incentives and by recognizing that social sanctions are costly to inflict or that individuals suer from time inconsistent preferences comparing the groups formed within our experiment with the real life risk sharing networks in a few villages allows us to test the external validity of our experiment and suggests that the results are salient to our understanding of risk sharing arrangements observed in developing countries jel classification numbers c93 d71 d81 o12

discounting behavior a reconsideration we re evaluate the theory experimental design and econometrics behind claims that individuals exhibit non constant discounting behavior theory points to the importance of controlling for the non linearity of the utility function of individuals since the discount rate is defined over time dated utility flows and not flows of money it also points to a menagerie of functional forms to characterize different types of non constant discounting behavior the implied experimental design calls for individuals to undertake several tasks to allow us to identify these models and to several treatments such as multiple horizons and the effect of allowing for a front end delay on earlier payments the implied econometrics calls for structural estimation of the theoretical models allowing for joint estimation of utility functions and discounting functions using data collected from a representative sample of 413 adult danes in 2009 we draw striking conclusions assuming an exponential discounting model we estimate discount rates to be 5 6 on average this is significantly lower than all previous estimates using controlled experiments we also find no evidence to support quasi hyperbolic discounting or fixed cost discounting and only modest evidence to support other specifications of non constant discounting furthermore the evidence for non constant discounting while statistically significant is not economically significant in terms of the size of the estimated discount rates we undertake extensive robustness checks on these findings including a detailed review of the previous comparable literature

testing new theories of choice under uncertainty using the common consequence effect a generalised common consequence problem is used to contrast the predictions of expected utility theory and several new theories of choice under uncertainty an experiment designed to test these predictions is reported systematic violations of expected utility theory are detected but although a consistent pattern emerges from the data it offers little support for any of the new theories the analysis is extended to test predictions which are unique to regret theory and significant regret effects are detected

preference reversal real world lotteries and lottery interested subjects prefer lce reversal or choice reservation price inconsistency has been documented experimentally for zrtain types of lotteries we argue that the relevance of these findings for realworld markets is uncertain because the type of objects used cannot exist on a market and because the extent to which the subjects had any real interest in the objects is unknown using reai world lotteries we have tested choice price consistency on subjects who prefer lotteries ta cash preference reversal was observed but the frequency was much lower than in earlier experiments there were no differences between subjects who qualified as lottery interested and those who did not 1 intmduction

risk aversion and incentive effects comment charles a holt and susan k laury 2002 develop an experimental design to determine the risk attitude of an individual they use their observations to argue that increased incentives appear to change risk attitudes leading to greater risk aversion popular utility functions that do not allow for such effects are therefore misspecified building on this finding they estimate a flexible utility function that characterizes their aggregate data well but that does not assume constant absolute or relative risk aversion the basic holt and laury 2002 hl design should become an important tool for the interpretation and design of experiments in which risk attitudes could play a role however their most important result showing the effect of scaling up the stakes of the lottery choice task is confounded by a possible order effect an order effect occurs when prior experience with one task affects behavior in a subsequent task the primary methodological contribution of experiments in economics is to enhance control ideally such control makes the explanatory variables of interest in this case scale orthogonal to other explanatory variables such as order allowing clearer inferences about behavior than one could get from field econometric data we argue that not controlling for order effects results in a misspecification of utility functions that is as important as that of scale the subjects in the hl design were given sequences of three or four tasks as shown in table 1 task 1 involved choices over lotteries with a baseline level of prizes which we will refer to as the 1 scale task 2 involved hypothetical choices over prizes with a scaled up level of prizes either 20 50 or 90 task 3 repeated task 2 but with choices that involved real payoffs task 4 was a return to the baseline task with real 1 prizes in some sessions subjects were not given task 2 or task 3 what could one infer from the comparison of measured risk attitudes in the 1 and 20 tasks in hl unfortunately any observed difference could be due either to the scale of the prizes involved or the task order or some combination of both thus the effect of scale is intrinsically confounded with the possible effect of task order this is a logical flaw in their design which

explaining african economic performance africa has had slow growth and a massive exodus of capital in many respects it has been the most capital hostile region we review and interpret the aggregate level and microeconomic literatures to identify the key explanations for this performance there is a reasonable correspondence of the two sets of evidence pointing to four factors as being important these are a lack of openness to international trade a high risk environment a low level of social capital and poor infrastructure these problems are to a substantial extent attributable to government behaviour and the paper includes a review of the political economy literature which addresses that behaviour

choice under uncertainty evidence from ethiopia india and uganda we review experimental evidence collected from risky choice experiments using poor subjects in ethiopia india and uganda using these data we estimate that just over 50 of our sample behaves in accordance with expected utility theory and that the rest subjectively weight probability according to prospect theory our results show that inferences about risk aversion are robust to whichever model we adopt when we estimate each model separately however when we allow both models to explain portions of the data simultaneously we infer risk aversion for subjects behaving according to expected utility theory and risk seeking behaviour for subjects behaving according to prospect theory

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

cluster sample methods in applied econometrics inference methods that recognize the clustering of individual observations have been available for more than 25 years brent moulton 1990 caught the attention of economists when he demonstrated the serious biases that can result in estimating the effects of aggregate explanatory variables on individual specific response variables the source of the downward bias in the usual ordinary least squares ols standard errors is the presence of an unobserved state level effect in the error term more recently john pepper 2002 showed how accounting for multi level clustering can have dramatic effects on t statistics while adjusting for clustering is much more common than it was 10 years ago inference methods robust to cluster correlation are not used routinely across all relevant settings in this paper i provide an overview of applications of cluster sample methods both to cluster samples and to panel data sets