Eliciting risk preferences: When is simple better? |
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Authors: | Chetan Dave Catherine C Eckel Cathleen A Johnson Christian Rojas |
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Institution: | (1) Department of Economics, New York University (Abu Dhabi), 19 W. 4th Street, 6FL, New York, NY 10012, USA;(2) School of Economic, Political and Policy Sciences, University of Texas at Dallas, 800 W. Campbell Rd., Richardson, TX 75080, USA;(3) Norton School of Family and Consumer Sciences, University of Arizona, 650 N. Park Avenue, Tucson, AZ 85719, USA;(4) Department of Resource Economics, University of Massachusetts Amherst, 219 Stockbridge Hall, Amherst, MA 01003, USA |
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Abstract: | We study the estimation of risk preferences with experimental data and focus on the trade-offs when choosing between two different
elicitation methods that have different degrees of difficulty for subjects. We analyze how and when a simpler, but coarser,
elicitation method may be preferred to the more complex, but finer, one. Results indicate that the more complex measure has
overall superior predictive accuracy, but its downside is that subjects exhibit noisier behavior. Our main result is that
subjects’ numerical skills can help better assess this tradeoff: the simpler task may be preferred for subjects who exhibit
low numeracy, as it generates less noisy behavior but similar predictive accuracy. For subjects with higher numerical skills,
the greater predictive accuracy of the more complex task more than outweighs the larger noise. We also explore preference
heterogeneity and provide methodological suggestions for future work. |
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