Time-based versus money-based decision making under risk: An experimental investigation

This paper investigates whether individuals make similar decisions under risk when the outcomes are expressed in time versus monetary units. We address this issue in two studies measuring individual risk preferences and prospect theory parameters (i.e., utility curvature, probability weighting, and loss aversion) for both time and money. In the first (resp., second) study we consider relatively small (resp., large) time and monetary outcomes. We find that individuals hold similar risk preferences for time and money; we also find evidence that “time is money” with regard to the utility curvature for gains, loss aversion, and decision weighting. However, individuals have different valuations of losing time and money. The utility function for small losses of money is more concave and variable than the utility function for small losses of time (Study 1), but the utility function for large losses of time is more concave and variable than that for large losses of money (Study 2). We argue that these results reflect a difference in the perceived slack of the respective resource.     

Replication: Cheating,loss aversion,and moral attitudes in Vietnam

We use the coin-flip paradigm and a short survey about moral attitudes under three conditions to answer three questions: (i) Do people cheat more when financial incentives are present in comparison with no incentives? (ii) Do they find it more difficult to maintain their ethical standards when they have been given a small amount of money? and (iii) Do moral attitudes predict cheating behavior? Using a sample of Vietnamese college students, we discover that a financial incentive does not matter until people feel that they are facing a loss. In addition, we do not find any evidence that moral attitudes could predict the unethical behavior in our sample. Our findings shed further light on cheating behaviors and loss aversion through an experimental investigation.     

SALARIES OR PIECE RATES: ON THE ENDOGENOUS MATCHING OF HARVEST WORKERS AND CROPS

The objective of this paper is to determine whether the choice of payment schemes (hourly vs. piece rates) is systematically related to the workers' risk aversion and ability. We derive the equilibrium relationship between agents' risk aversion and ability and the power of incentives (payment scheme) in a market where many heterogeneous principals and agents are endogenously matched. The equilibrium matching between principals and agents depends on the traits and is critical in determining the contract choice. Using confidential data from the National Agricultural Workers Survey (NAWS), we find evidence of matching between agricultural workers and the riskiness of their jobs (crops they harvest) based on workers' risk aversion and no matching based on ability. When controlling for matching, we find strong evidence that high risk‐averse workers choose hourly rates and low risk‐averse workers choose piece rates. We also found that high ability types choose piece rates and low ability types choose hourly rates but the evidence is weaker. (JEL J33, D82, Q12)     

DISAPPOINTMENT AVERSION AND SOCIAL COMPARISONS IN A REAL‐EFFORT COMPETITION

We present an experiment to investigate the source of disappointment aversion in a sequential real‐effort competition. Specifically, we study the contribution of social comparison effects to the disappointment aversion previously identified in a two‐person real‐effort competition (Gill, D., and V. Prowse. “A Structural Analysis of Disappointment Aversion in a Real Effort Competition.” American Economic Review, 102, 2012, 469–503). To do this we compare “social” and “asocial” versions of the Gill and Prowse experiment, where the latter treatment removes the scope for social comparisons. If disappointment aversion simply reflects an asymmetric evaluation of losses and gains we would expect it to survive in our asocial treatment. Alternatively, if losing to or winning against another person affects the evaluation of losses/gains, as we show would be theoretically the case under asymmetric inequality aversion, we would expect treatment differences. We find behavior in social and asocial treatments to be similar, suggesting that social comparisons have little impact in this setting. Unlike in Gill and Prowse we do not find evidence of disappointment aversion. (JEL C91, D12, D81, D84)     

STOCK RETURNS, ASYMMETRIC VOLATILITY, RISK AVERSION, AND BUSINESS CYCLE: SOME NEW EVIDENCE

We study how three interrelated phenomena—excess stock returns and risk relation, risk aversion, and asymmetric volatility movement—change over business cycles. Using an asymmetric generalized autoregressive conditional heteroskedasticity in mean model and a Markov switching model, we find that excess stock return increases and asymmetric volatility movement is weakened during boom periods. This suggests that investors become more risk-averse during boom periods (i.e., procyclical risk aversion), which we confirm using a calibration of a simple equilibrium model . ( JEL C32, E32, G12)     

Business strategy and the social norm of tipping

Tipping is an important economic phenomenon, involving about $47 billion a year in the US food industry alone, and trillions of dollars across different occupations and countries over the years. Moreover, tipping is a major source of income for millions of workers. This article discusses the implications of tipping for business strategy in the relevant industries. For example, firms can choose to impose a compulsory service charge in lieu of tipping - what are the advantages and disadvantages of doing so? How does tipping change the profit-maximizing level of investing in screening job applicants, training workers, monitoring them, and providing performance-based incentives by the firm? Can industries such as the music industry use tips (i.e., prices being voluntary and determined by the customers) as an alternative business model?     

THE ROLE OF NONCOGNITIVE SKILLS IN EXPLAINING COGNITIVE TEST SCORES

This article examines whether noncognitive skills—measured both by personality traits and by economic preference parameters—influence cognitive tests' performance. The basic idea is that noncognitive skills might affect the effort people put into a test to obtain good results. We experimentally varied the rewards for questions in a cognitive test to measure to what extent people are sensitive to financial incentives. To distinguish increased mental effort from extra time investments, we also varied the questions' time constraints. Subjects with favorable personality traits such as high performance motivation and an internal locus of control perform relatively well in the absence of rewards, consistent with a model in which trying as hard as you can is the best strategy. In contrast, favorable economic preference parameters (low discount rate, low risk aversion) are associated with increases in time investments when incentives are introduced, consistent with a rational economic model in which people only invest when there are monetary returns. The main conclusion is that individual behavior at cognitive tests depends on noncognitive skills. ( JEL J20, J24)     

Can gender differences in distributional preferences explain gender gaps in competition?

We design a lab experiment to specifically examine whether a preference for favorable inequality and behindness aversion, as well as egalitarian preferences, affect competitive choices differently among males and females. Using data on approximately 2,000 subjects, we find that selection into competitive environments is negatively related to egalitarian preferences, with smaller negative impacts of being egalitarian on females’ choice to compete. Further, behindness aversion and preference for favorable inequality affect willingness to compete in opposite ways. The willingness to compete is negatively affected by behindness aversion, while a preference for favorable inequality positively influences willingness to compete. Interestingly, when we disaggregate behavior along gender lines, we find that compared to behindness averse males, behindness averse females are more likely to enter the competitive environment. In contrast, there is no significant gender difference in the impact of preference for favorable inequality on competition. Our results suggest that the observed gender difference in competitiveness can stem from male-female differences in distributional preferences and selected personality traits developed during one’s lifetime.     

Choice set,relative income,and inequity aversion: An experimental investigation

Inequity aversion preference has been widely applied in interpretations of various economic behaviors. A rapidly growing literature has been attempting to measure the strength of inequity aversion preferences as accurately as possible. We vary two factors that might affect the accuracy of the measurement of inequity aversion preference, i.e., choice sets with different underlying inequity aversion strength ranges and with different relative income inequities while absolute income inequities remain fixed. We find that unidirectional changes in the choice sets for disadvantageous and advantageous inequity aversion preferences significantly bias the measured strength of both preferences in the same directions of the changes and that the variance in inequity aversion increases with the range of choice sets. Moreover, a decrease in relative income inequity raises the measured strength of advantageous inequity aversion but does not affect disadvantageous inequity aversion preference. Our results suggest controlling for choice sets and relative income inequity between players to improve the measurement accuracy of inequity aversion preference.     

Behavioral implications of providing real incentives in stated choice experiments

This paper explores the potential impacts of introducing real economic incentives in choice experiments (CE). While many others have investigated such impacts before, the majority of the literature has focused solely on mitigation of hypothetical bias. We contribute to this literature by widening the scope of research to other behavioral aspects where consumers in CE are often found to deviate from homo economicus. We develop a theoretical model where not only Willingness to pay (WTP) measures but also decision processing can be affected by the introduction of an economic incentive. Specifically, our model allows for differential impacts on attribute processing, depending on the character of the attribute as well as self-image effects. In an empirical CE survey, we find some, though not unequivocal, support of our model. Even though we find no impact on WTP from introducing an economic incentive, we find marked benefits in relation to a number of behavioral aspects that together would favor the use of an economic incentive regardless of hypothetical bias being present or not.     

PORTFOLIO CHOICE AND RISK ATTITUDES: AN EXPERIMENT

Using financial incentives, we study how portfolio choice (how much to invest in a risky asset) depends on three well-known behavioral phenomena: ambiguity aversion, the illusion of control, and myopic loss aversion. We find evidence that these phenomena are present and test how the level of investment is affected by these motivations; at the same time, we investigate whether participants are willing to explicitly pay a small sum of money to indulge preferences for less ambiguity, more control, or more frequent feedback/opportunities to choose the investment level. First, the observed preference for "control" did not affect investment behavior and in fact disappeared when participants were asked to actually pay to gain more control. Second, while people were indeed willing to pay for less ambiguity, the level of ambiguity did not influence investment levels. Finally, participants were willing to pay to have more frequent feedback opportunities to change their portfolio, even though prior research has shown that people invest less in risky assets (and earn less) in this case . ( JEL B49, C91, D81, G11, G19)     

ROBUSTNESS OF BIDDER PREFERENCES AMONG AUCTION INSTITUTIONS

In previous work, we found that bidders strongly prefer the ascending to the first‐price sealed‐bid auction on a ceteris paribus basis, but perhaps surprisingly, they are not willing to pay up to an entry price for the ascending auction that would equalize the profits. Risk aversion was proposed as an explanation. In this study, we examine two alternative explanations for the observed behavior: loss aversion and aversion to the dynamic bidding process. We find that neither alternative explanation can account for bidders’ auction choice behavior, leaving risk aversion as the only unfalsified hypothesis. (JEL C91, D44)     

Windows to the Soul? Deliberate Eye Contact as a Cue to Deceit

Although people overwhelmingly believe that liars avoid eye contact, meta-analyses of deception literature have shown a non-significant relationship between gaze and deception. In the present experiment we measured eye movements in an innovative way. We coded the extent to which interviewees deliberately made eye contact with the interviewer. Liars take their credibility less for granted than truth tellers. They therefore may have a greater desire to be convincing and hence more inclined to monitor the interviewer to determine whether they seem to be being believed. We therefore hypothesized that liars would give more appearance of deliberately making eye contact than truth tellers (a relationship which opposes the stereotypical belief that liars look away). A total of 338 passengers at an international airport told the truth or lied about their forthcoming trip. As well as the deliberate eye contact variable, we coded the amount of time the interviewees looked away from the interviewer (e.g., gaze aversion), which is typically examined in deception research. Liars displayed more deliberate eye contact than truth tellers, whereas the amount of gaze aversion did not differ between truth tellers and liars.     

Income in jeopardy: How losing employment affects the willingness to take risks

Identifying the determinants of risk-taking is crucial for our understanding of a variety of choices. Using German panel data, we find that people become more risk-averse when losing work. The immediate income loss does not mediate this effect. It seems also unrelated to the loss of non-monetary benefits of work and to changes of worker’s emotional state. However, we find that risk aversion responds the more strongly to losing work the more future income is at stake, and that the effect manifests itself already on the eve of job loss when people do not yet suffer from the consequences of the event. We conclude that lower future income expectations and more uncertainty about future incomes may explain the effect of job loss on risk attitude. Our results might imply that a recession may reinforce itself as it induces people to fear job loss, which raises their risk aversion and might therefore reduce the willingness to invest in risky projects. Moreover, self-assessed risk attitude seems to measure absolute risk aversion and thus not only an underlying risk preference parameter.     

Impulsiveness moderates the effects of exogenous attention on the sensitivity to gains and losses in risky lotteries

Does attention have a causal impact on risky decisions? We address this question in a preregistered experiment in which participants accept or reject a series of mixed gambles while exogenously varying how information can be sampled. Specifically, in each trial participants observe the outcomes of a mixed-gamble with gains and losses presented sequentially. To isolate the causal role of attention on the decision process, we manipulate for how long a specific attribute is presented before showing the next one (e.g., 600 ms/800 ms vs 400 ms). Our results partially confirm our preregistered hypotheses that longer exposure to an attribute increases its weight on the decision. While we find no effects on choice frequency, we observe specific effects on the decision weights of our Random Utility Model. Presenting losses longer (for 600 ms, but not 800 ms) than gains (400 ms) leads to increased sensitivity for losses. When gains are presented for longer (600 ms and 800 ms) than losses (400 ms), the participants show increased sensitivity to both gain and loss values in their decision. Loss aversion reflects this trend across attention treatments, but differences remain non-significant. Further exploratory analyses show that specifically participants with higher impulsiveness become more sensitive to attribute values when gains are presented for longer. Jointly, these results support the notion that attention has a causal impact on the sensitivity to specific attributes during risky choice. Moreover, our results underline the moderating role of impulsiveness on the relationship between attention and choice.     

RISK TAKING FOR ONESELF AND OTHERS: A STRUCTURAL MODEL APPROACH

Economic theory makes no predictions about social factors affecting decisions under risk. We examine situations in which a decision maker decides for herself and another person under conditions of payoff equality, and compare them to individual decisions. By estimating a structural model, we find that responsibility leaves utility curvature unaffected, but accentuates the subjective distortion of very small and very large probabilities for both gains and losses. We also find that responsibility reduces loss aversion, but that these results only obtain under some specific definitions of the latter. These results serve to generalize and reconcile some of the still largely contradictory findings in the literature. They also have implications for financial agency, which we discuss.     

The effects of 9/11 on intermarriage between natives and immigrants to the U.S.

The existing literature generally finds a negative impact of the 9/11 tragedy on immigrants?? labor market performance, consistent with increased discrimination in the labor market and stricter immigration policies. In this paper, we examine the impact of this tragic event on a particular measure of immigrants?? social outcomes??marriage with a native or intermarriage. We find that the tragic event actually increases Hispanic immigrants?? probability of being married to a native. We suggest that our results could be explained by that after 9/11, the deteriorated labor market conditions, along with tightened immigration policies, may have led to increased incentives of immigrants to marry natives. This effect is large relative to the potential discrimination effect, if any, that could reduce natives?? willingness to marry an immigrant. We also find that the magnitude of the effect is much smaller in the years immediately following 9/11 and becomes larger over time; and that there exists a large, statistically significant gender difference in the effects of 9/11 on intermarriage outcomes. Finally, we conduct indirect tests of proposed explanations; and our results imply existence of economic gains from intermarriage, and that discrimination may indeed exist.     

Gender differences in social risk taking

Women in Western societies are typically more risk averse than men in individual risk taking decisions. In real life, however, risk taking decisions are usually made in a social context. So far, empirical evidence whether gender differences are also present in the social risk taking domain is missing. We use a controlled experiment to analyze gender differences in social risk taking. We find that inequality aversion is the main driver for risk aversion in social risk taking. Disaggregating the data for males and females shows that this effect is mainly driven by strong inequality aversion of women. Moreover, by running the experiment with non-standard subjects from an egalitarian small-scale society, our results suggest that gender differences in social risk taking are culture-specific.     

Risk preferences and child investments: evidence from Mexico

This paper examines how parental risk aversion influences child investments. Using an experimental measure of risk aversion from the Mexican Family Life Survey, I find that boys have higher weight-for-age and BMI-for-age in households where the mother is highly risk averse. The higher BMI is not necessarily healthy because the boys are more likely to be in the overweight range and less likely to be in the normal range. I also find evidence that risk averse mothers spend more on their son’s schooling related expenditures such as materials, uniforms, and spending money. A comparison of siblings reveals a gender gap in child investments that is increasing in maternal risk aversion.     

Work Incentive and Labor Force Participation after the Senior Citizens Freedom to Work Act of 2000

A larger share of individuals 65 and older have been staying in or returning to the labor force since the late 1980s. Because Social Security was changed from providing incentives for earlier withdrawal from the labor force to providing incentives to remain in the labor market longer, we can expect to find a relationship between the Retirement Earnings Test removal and labor force participation. The findings have implications for welfare policy such that they can increase the portion of older adults who work.