Risk aversion and framing effects |
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Authors: | Louis Lévy-Garboua Hela Maafi David Masclet Antoine Terracol |
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Institution: | (1) Georgia State University, 14 Marietta Street NW, Atlanta, GA 30303, USA;(2) Georgia State University, 14 Marietta Street NW, Atlanta, GA 30303, USA |
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Abstract: | We present a new experimental evidence of how framing affects decisions in the context of a lottery choice experiment for
measuring risk aversion. We investigate framing effects by replicating the Holt and Laury’s (Am. Econ. Rev. 92:1644–1655,
2002) procedure for measuring risk aversion under various frames. We first examine treatments where participants are confronted
with the 10 decisions to be made either simultaneously or sequentially. The second treatment variable is the order of appearance of the ten lottery pairs. Probabilities of winning are ranked either
in increasing, decreasing, or in random order. Lastly, payoffs were increased by a factor of ten in additional treatments. The rate of inconsistencies was significantly
higher in sequential than in simultaneous treatment, in increasing and random than in decreasing treatment. Both experience
and salient incentives induce a dramatic decrease in inconsistent behaviors. On the other hand, risk aversion was significantly
higher in sequential than in simultaneous treatment, in decreasing and random than in increasing treatment, in high than in
low payoff condition. These findings suggest that subjects use available information which has no value for normative theories,
like throwing a glance at the whole connected set of pairwise choices before making each decision in a connected set of lottery
pairs. |
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Keywords: | |
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