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Inducing risk neutral preferences with binary lotteries: A reconsideration

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  • Harrison, Glenn W.
  • Martínez-Correa, Jimmy
  • Swarthout, J. Todd

Abstract

We evaluate the binary lottery procedure for inducing risk neutral behavior. We strip the experimental implementation down to bare bones, taking care to avoid any potentially confounding assumptions about behavior having to be made. In particular, our evaluation does not rely on the assumed validity of any strategic equilibrium behavior, or even the customary independence axiom. We show that subjects sampled from our population are generally risk averse when lotteries are defined over monetary outcomes, and that the binary lottery procedure does indeed induce a statistically significant shift toward risk neutrality. This striking result generalizes to the case in which subjects make several lottery choices and one is selected for payment.

Suggested Citation

  • Harrison, Glenn W. & Martínez-Correa, Jimmy & Swarthout, J. Todd, 2013. "Inducing risk neutral preferences with binary lotteries: A reconsideration," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 145-159.
    • Handle: RePEc:eee:jeborg:v:94:y:2013:i:c:p:145-159
    DOI: 10.1016/j.jebo.2012.09.008
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    More about this item

    Keywords

    Binary lottery procedure; Experimental economics; Risk neutrality;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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