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

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

magnitude time and risk differ similarly between joint and single evaluations arguably all choice options involve three basic attributes magnitude outcome size time of occurrence and probability of occurrence and are evaluated in one of two basic evaluation modes je joint evaluation involving comparison of multiple options and se single evaluation without comparison this research explores how reactions to the three basic attributes and their associated functions utility time discounting and probability weighting vary between the two basic evaluation modes nine studies tapping diverse contexts yield two general results first for all these attributes people are more sensitive to variations near endpoints zero magnitude no delay and 0 or 100 probability than in other regions and this differential sensitivity is more pronounced in se than in je second when faced with options involving a trade off between magnitude and time delay or between magnitude and probability risk people are both more delay averse and more risk averse in se than in je

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

the uncertainty effect when a risky prospect is valued less than its worst possible outcome expected utility theory prospect theory and most other models of risky choice are based on the fundamental premise that individuals choose among risky prospects by balancing the value of the possible consequences these models therefore require that the value of a risky prospect lie between the value of that prospect s highest and lowest outcome although this requirement seems essential for any theory of risky decision making we document a violation of this condition in which individuals value a risky prospect less than its worst possible realization this demonstration which we term the uncertainty effect draws from more than 1000 experimental participants and includes hypothetical and real pricing and choice tasks as well as field experiments in real markets with financial incentives our results suggest that there are choice situations in which decision makers discount lotteries for uncertainty in a manner that cannot be accommodated by standard models of risky choice from the time of bernoulli on it has been common to argue that a individuals tend to display aversion to the taking of risks and b that risk aversion in turn is an explanation for many observed phenomena in the economic world arrow 1971 p 90

waiting or acting now the effect on willingness to pay of delivering inherent uncertainty information in choice experiments abstract this paper analyzes the effect of inherent uncertainty on the willingness to pay wtp for a policy aimed at reducing expected climate change impacts to do this it relates outcome uncertainty to the probability of occurrence of one of these impacts within a given time horizon unlike the existing studies this paper links outcome uncertainty to the uncontrollable component of environmental uncertainty derived from the stochastic nature of an ecosystem s behavior results show that the wtp for the policy in the presence of uncertainty does not decrease compared to the scenario where climate change impacts are assumed to occur with certainty this suggests individuals are adopting a precautionary attitude when stating their wtp thus the paper provides economic justification for preventive measures in highly uncertain contexts however findings are not conclusive with respect to the influence of the degree of uncertainty on the support for such measures

certain and uncertain utility a new perspective on financial innovation we show that discontinuous preference over certain and uncertain outcomes as in andreoni and sprenger 2009 2012 have interesting implications for financial innovations it motivates financial innovations aimed at carving riskless assets from risky ones if improbable risks are neglected then excess carving may take place with disastrous subsequent consequences

on portfolio choice with savoring and disappointment we revisit the model proposed by gollier and muermann gollier c muermann a 2010 optimal choice and beliefs with ex ante savoring and ex post disappointment management sci 568 1272 1284 hereafter gm in the gm model for a given lottery agents form anticipated expected payoffs and the set of possible anticipations is assumed to be exogenously fixed we propose sets of possible anticipations that are endogenously determined this permits us to compare and evaluate in a consistent manner lotteries with different supports and to revisit the portfolio choice problem we obtain new conclusions and interesting insights our extended model can rationalize a variety of empirically observed puzzles such as a positive demand for assets with negative expected returns preference for skewed returns and underdiversification of portfolios this paper was accepted by rakesh sarin decision analysis

tariff escalation and vertical market structure many empirical studies have shown that most countries in the world reveal a specific form of tariff structure referred to as tariff escalation which is defined as tariff rates for final products being higher than those for intermediate goods and the latter are higher than those for raw materials however trade theorists have paid scant attention to the causes of tariff escalation to fill this gap we set up a vertically related market model with n stages of successive monopolies we find that a tariff on an imported good can be used to extract not only the profit of the foreign monopolist supplying this good but also the rents acquired by all the foreign upstream monopolists through its effects on the prices of the upstream intermediate goods thus as the number of production stages in the foreign country increases the amount of rent captured by the foreign upstream producers rises and a higher tariff rate is therefore needed to extract the rent this provides a theoretical explanation to the cause of tariff escalation

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

procedures for eliciting time preferences we study three procedures to elicit attitudes toward delayed payments the becker degroot marschak procedure the second price auction and the multiple price list the payment mechanisms associated with these methods are widely considered as incentive compatible thus if preferences satisfy procedure invariance which is also widely and often implicitly assumed they should yield identical time preference distributions we find instead that the monetary discount rates elicited using the becker degroot marschak procedure are significantly lower than those elicited with a multiple price list we show that the behavior we observe is consistent with an existing psychological explanation of preference reversals

on the analysis of tariff escalation is there a methodological bias against the interest of developing countries abstract for various reasons relating to the achievement of industrialization objectives many economists have urged that developing countries shift the composition of their exports from primary commodities to semi finished goods or manufactures one method for achieving this change is to increase the processing of natural resource based products that are currently exported in their primary unprocessed form however numerous studies have argued that the tendency of developed country tariffs to increase or escalate with the degree of processing is an important constraint to local processing of primary commodities in developing countries in previous analyses relating to this issue a tariff bias against processed goods was held to exist when nominal or effective tariffs increased steadily over stages of a processing chain however the present study shows that the existence of escalation is neither a necessary nor a sufficient condition to establish a bias against processed goods in addition once the theoretical basis for establishing such a bias is clearly specified it is apparent that the discriminatory effects of tariffs on processed goods are more important than previously realized the fact that developing countries have insisted that the issue of tariff escalation be placed on the agenda of the november 1982 gatt ministerial meeting highlights the importance of this conclusion

valuing money and things why a 20 item can be worth more and less than 20 the study of risky decision making has long used monetary gambles to study choice but many everyday decisions do not involve the prospect of winning or losing money monetary gambles as it turns out may be processed and evaluated differently than gambles with nonmonetary outcomes whereas monetary gambles involve numeric amounts that can be straightforwardly combined with probabilities to yield at least an approximate expectation of value nonmonetary outcomes are typically not numeric and do not lend themselves to easy combination with the associated probabilities compared with monetary gambles the evaluation of nonmonetary prospects typically proves less sensitive to changes in the probability range inside the extremes of certainty and impossibility which among other things can yield preference reversals generalizing on earlier work that attributed similar findings to the role of affect in the evaluation process rottenstreich y c k hsee 2001 money kisses and electric shocks an affective psychology of risk psych sci 12 3 185 190 we attribute the observed patterns to a fundamental difference in the evaluation of monetary versus nonmonetary outcomes potential pitfalls in the use of monetary gambles to study choice are highlighted and implications and future directions are discussed

a context dependent model of the gambling effect this paper presents a context dependent theory of decision under risk the relevant contextual factor is the presence of a riskless lottery in a preference comparison the theory only deviates from expected utility if the set of options contains both riskless and risky lotteries the main motivation for the theory is to explain the gambling effect contrary to previous theories of the gambling effect the present theory is consistent with stochastic dominance it can however violate transitivity the theory allows for a decomposition of the interaction between risk aversion and gambling aversion and thereby extends the classical arrow pratt measure of risk aversion

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

tariff escalation and invasive species damages we investigate the interface between trade and damages from invasive species is focusing on escalation in tariffs between raw input and processed good markets and its implication for is based damages the current tariff escalation in processed agro forestry products motivates our analysis tariff escalation exacerbates the likelihood of is introduction by biasing trade flows towards increased trade of primary commodity flows and against processed product trade we show that a reduction of tariff escalation by lowering the tariff on processed goods increases allocative efficiency and reduces is based damages a win win situation we also identify policy menus for trade reforms involving tariffs on both raw input and processed goods leading to win win situations

field experiments on the anchoring of economic valuations i introduction take the last three digits of your social security number ssn turn those numbers into a dollar value i e if your numbers are 462 then they provide a value of 462 consider whether you would be willing to pay that dollar amount for a first edition of j r r tolkien s the hobbit now how much would you actually pay for a first edition original copy a stylized result from laboratory experiments in economics and psychology is that the answer to the latter valuation question can be strongly influenced by the dollar amount computed at the start 1 critics of neoclassical theory have argued that the influence of uninformative anchors such as the transformed ssn refutes the notion that decision makers preferences are predefined consistent and stable instead they are constructed during the process of choice bettman luce and payne 1998 hoeffler and ariely 1999 slovic 1995 a natural conclusion one might draw from studies of anchoring is that decisions may be influenced by irrelevant circumstances and optimization principles do not apply the laboratory evidence consonant with anchoring effects is considerable tversky and kahneman 1974 make a seminal contribution implementing a protocol similar to the one described above to examine general knowledge questions 2 furnham and boo 2011 provide a recent review of the literature and identify more than 25 studies that report significant anchoring effects substantive areas investigated include general knowledge questions epley and gilovich 2006 tversky and kahneman 1974 probability estimates wright and anderson 1989 legal judgments englich and mussweiler 2001 forecasting switzer and sniezek 1991 and valuation and purchasing decisions ariely loewenstein and prelec 2003 taken together the results suggest strong effects from anchoring protocols even in areas where subjects have significant experience yet the importance of anchoring for economic outcomes remains an open question one reason is that research goals and methods differ across the disciplines of psychology and economics croson 2005 hertwig and ortmann 2001 plott 1996 3 fumham and boo 2011 note that drawing generalizable conclusions from the existing anchoring studies is difficult as many involve undergraduate students engaged with topics they are unlikely to encounter in field settings their observation is consistent with the criticism of the ecological validity of many studies made by gerd gigerenzer and colleauges gigerenzer et al 2008 discussed in our footnote 2 while the results of these studies may help distinguish among competing causal claims about the anchoring process they are less relevant for understanding the potential for anchors to affect market equilibria further many of the studies lack meaningful incentives and we believe that economists are justifiably circumspect about results that may merely reflect mistakes made by unmotivated subjects consistent with this view is the idea that with appropriate incentives and feedback anchoring effects should diminish and behavior more closely match predictions from neoclassical models 4 recent attempts to examine the relevance of anchoring for economic outcomes closely follow ariely loewenstein and prelec 2003 alp hereafter who find statistically and economically significant effects of anchors on willingness to pay wtp for common consumer goods and on willingness to accept wta for unpleasant sounds and tastes bergman et al 2010 and fudenberg levine and maniadis 2012 flm hereafter replicate the consumer goods portion of the alp study with mixed results bergman et al 2010 find significant anchoring results consistent with the earlier work although the magnitude of the effect is smaller implementing an auxiliary protocol they find also that anchoring effects diminish with cognitive ability flm 2012 attempt to anchor both wtp and wta and find no evidence of anchoring in the wtp treatment

insurance contracts when individuals greatly value certainty results from a field experiment in burkina faso abstract in discussing the paradoxical violation of expected utility theory that bears his name maurice allais noted that people tend to greatly value certainty allais observation implies that people will undervalue insurance relative to the predictions of expected utility theory because as conventionally constructed insurance offers an uncertain benefit in exchange for a certain cost pursuing this logic we implemented insurance games with cotton farmers in burkina faso on average farmer willingness to pay for insurance increases significantly when a premium rebate framing is used to render both costs and benefits of insurance uncertain we show that the impact of the rebate frame on the willingness to pay for insurance is driven by those farmers who exhibit a well defined discontinuous preference for certainty a concept that we adapt from the u v model of utility and measure with a novel behavioral experiment given that the potential impacts of insurance for small scale farmers are high and yet demand for conventionally framed contracts is often low the insights from this paper suggest welfare enhancing ways of designing insurance for low income farmers

the motivating uncertainty effect uncertainty increases resource investment in the process of reward pursuit can a reward of an uncertain magnitude be more motivating than a reward of a certain magnitude this research documents the motivating uncertainty effect and specifies when this effect occurs people invest more effort time and money to qualify for an uncertain reward e g a 50 chance at 2 and a 50 chance at 1 than a certain reward of a higher expected value e g a 100 chance at 2 this effect arises only when people focus on the process of pursuing a reward not when they focus on the outcome the reward itself when the focus is on the process of reward pursuit uncertainty generates positive experience such as excitement and hence increases motivation four studies involving real rewards lend support to the motivating uncertainty effect this research carries theoretical implications for research on risk preference and motivation and practical implications for how to devise cost efficient consumer incentive systems

do markets reveal preferences or shape them we contrast the proposition that markets reveal independently existing preferences with the alternative possibility that they may help to shape them using demand revealing experimental market institutions we separate the shaping effects of price cues from the effects of market discipline we find that individual valuations and prevailing prices are systematically affected by both exogenous manipulations of price expectations and endogenous but divergent price feedback these effects persist to varying degrees in spite of further market experience in some circumstances market experience may actually consolidate them we discuss possible explanations for these effects of uninformative price cues on revealed preferences

strengthening state capabilities the role of financial incentives in the call to public service we study a recent recruitment drive for public sector positions in mexico different salaries were announced randomly across recruitment sites and job offers were subsequently randomized screening relied on exams designed to measure applicants intellectual ability personality and motivation this allows the first experimental estimates of i the role of financial incentives in attracting a larger and more qualified pool of applicants ii the elasticity of the labor supply facing the employer and iii the role of job attributes distance attractiveness of the municipal environment in helping fill vacancies as well as the role of wages in helping fill positions in less attractive municipalities a theoretical model guides each stage of the empirical inquiry we find that higher wages attract more able applicants as measured by their iq personality and proclivity towards public sector work i e we find no evidence of adverse selection effects on motivation higher wage offers also increased acceptance rates implying a labor supply elasticity of around 2 and some degree of monopsony power distance and worse municipal characteristics strongly decrease acceptance rates but higher wages help bridge the recruitment gap in worse municipalities

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

incorporating outcome uncertainty and prior outcome beliefs in stated preferences stated preference studies tell respondents that policies create environmental changes with varying levels of uncertainty however respondents may include their own a priori assessments of uncertainty when making choices among policy options using a choice experiment eliciting respondents preferences for conservation policies under climate change we find that higher outcome uncertainty reduces utility when accounting for endogeneity we find that prior beliefs play a significant role in this cost of uncertainty thus merely stating objective levels of outcome uncertainty will not necessarily solve the problem of people valuing something differently from originally intended respondents prior beliefs must be accounted for

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

framing influences willingness to pay but not willingness to accept the authors show with real and hypothetical payoffs that consumers are willing to pay substantially less for a risky prospect when it is called a lottery ticket raffle coin flip or gamble than when it is labeled a gift certificate or voucher willingness to accept in contrast is not affected by these frames this differential framing effect is the result of an aversion to bad deals which causes buyers to focus on different aspects than sellers buyers willingness to pay is influenced by the extent to which a risky prospect s frame is associated with risk experiment 1 as well as the prospect s lowest but not highest possible outcome experiment 2 sellers willingness to accept in contrast is influenced by a prospect s lowest and highest possible outcomes but not by the risk associated with its frame experiments 2 and 3 the framing effect on willingness to pay is independent of the objective level of uncertainty experiment 4 and can lead to the uncertainty effect the findi

impacts of tariff escalation on the environment literature review and synthesis abstract writers on trade and environment often claim that tariff escalation harms the environment it skews exports toward raw materials and away from processed goods so to the extent that primary production degrades the environment more than processing it will harm exporting countries this paper reviews the literature on tariff escalation and the environment focusing on 1 a impact of escalating tariffs on the allocation of production and processing between exporters and importers 2 b comparison of the environmental impacts of primary production and processing 3 c impact of increased income from removing tariff escalation on environmental protection expenditures 4 d environmental impact of decreased transport of freight it concludes that tariff escalation is not likely to be a significant source either of economic distortion or of environmental harm

risk preferences are not time preferences risk and time are intertwined the present is known while the future is inherently risky this is problematic when studying time prefer ences since uncontrolled risk can generate apparently present biased behavior we systematically manipulate risk in an intertemporal choice experiment discounted expected utility performs well with risk but when certainty is added common ratio predictions fail sharply the data cannot be explained by prospect theory hyperbolic discounting or preferences for resolution of uncertainty but seem consistent with a direct preference for certainty the data suggest strongly a difference between risk and time preferences jel c91 d81 d91 understanding individual decision making under risk and over time are two foundations of economic analysis 1 in both areas there has been research to suggest that standard models of expected utility eu and exponential discounting are flawed or incomplete regarding time experimental research has uncovered evidence of a present bias or hyperbolic discounting frederick loewenstein and o donoghue 2002 regarding risk there are number of well documented departures from eu such as the allais 1953 common consequence and common ratio paradoxes an organizing principle behind expected utility violations is that they seem to arise as so called boundary effects where certainty and uncertainty are combined camerer 1992 harless and camerer 1994 and starmer 2000 indicate that violations of expected utility are notably less prevalent when all choices are uncertain this observation is especially interesting when considering decisions about risk taking over time in particular certainty and uncertainty are combined in intertemporal decisions the present is known and certain while the future is inherently risky this observation is problematic if one intends to study time preference in isolation from

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

the fun and function of uncertainty uncertain incentives reinforce repetition decisions this research studies repetition decisions namely whether to repeat a behavior e g a purchase after receiving an incentive e g a discount can uncertainty drive repetition four experiments all involving real consequences for each individual participant document a counterintuitive reinforcing uncertainty effect individuals repeat a behavior more if its incentive is uncertain than if it is certain even when the certain incentive is financially better this effect is robust it holds in both lab and field settings and at both small and large magnitudes furthermore the experiments identify two theory driven boundary conditions for the reinforcing uncertainty effect the effect arises a only if the uncertainty is resolved immediately and not if the resolution of uncertainty is delayed and b only after not before one has engaged in repetitions these results support a resolution as reward account and cast doubt on other explanations such as reference dependent preferences this research reveals the hidden value of uncertain incentives and sheds light on the delicate relationship between incentive uncertainty and repetition decisions

why the european union should adopt formula apportionment with a sales factor using a two country tax competition model with a multinational enterprise mne this paper addresses the question of whether the european union should replace separate accounting sa in corporate income taxation by formula apportionment fa and if so which apportionment factors should be used our main result is that fa with a sales factor may mitigate or even eliminate fiscal externalities caused by the countries tax policy hence our analysis provides a microfoundation for the sales apportionment factor in an empirical calibration to the eu 15 we show that the transition from sa to fa with a sales only formula raises average tax rates by 2 and average tax revenues by 1 billion euros or 0 1 of gdp these effects result in an increase of welfare