The influence of probabilities on the response mode bias in utility elicitation |
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Authors: | Christopher Schwand Rudolf Vetschera Lea M Wakolbinger |
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Institution: | 1.IMC University of Applied Sciences Krems,Krems,Austria;2.Department of Business Administration,University of Vienna,Vienna,Austria |
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Abstract: | The response mode bias, in which subjects exhibit different risk attitudes when assessing certainty equivalents versus indifference
probabilities, is a well-known phenomenon in the assessment of utility functions. In this empirical study, we develop and
apply a cardinal measure of risk attitudes to analyze not only the existence, but also the strength of this phenomenon. Since
probability levels involved in decision problems are already known to have a strong impact on behavior, we use this approach
to study the impact of probabilities on the extent of the response mode bias. We find that the direction in which probabilities
influence measured risk aversion is the opposite in the certainty equivalence (CE) method versus in the probability equivalence
(PE) method. Utilizing the CE elicitation approach leads to an increase of risk seeking for gambles involving high probabilities.
For the PE method, subjects tend to behave risk averse with gambles of high probabilities. This behavior is reversed in the
gain domain. This “tailwhip” effect is consistently replicated in several experiments, involving both loss and gain domains
of lotteries. |
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