Choosing a gambling partner: testing a model of mutual insurance in the lab (original) (raw)
Related papers
Choosing the Right Gambling Partner: Experimental Evidence
2009
In this paper we investigate the behavior of economic agents facing situa& tions in which they are required to team up with other agents. In particular, we consider the case in which the future decisions of partners, albeit inde& pendently taken, affect the cumulative returns that they ...
Group and individual risk preferences : a lottery-choice experiment
2006
This paper focuses on decision making under risk, comparing group and individual risk preferences in a lottery-choice experiment inspired by . The experiment presents subjects with a menu of unordered lottery choices which allows us to measure risk aversion. In the individual treatment, subjects make lottery choices individually; in the group treatment, each subject was placed in an anonymous group of three, where unanimous lottery choice decisions were made via voting. Finally, in a third treatment, called the choice treatment, subjects could choose whether to be on their own or in a group. Our main findings are that groups are more likely than individuals to choose safe lotteries for decisions with low winning percentages. Moreover, groups converge toward less risky decisions because subjects who were relatively less risk averse were more likely to change their vote in order to conform to the group average decision; more risk-averse individuals were less likely to change their preferences. Finally our results reveal a positive relationship between preference for risk and willingness to decide alone.
Risk Taking Behavior: An Experimental Analysis of Individuals and Pairs
The decision to undertake risk is often made in groups, while much of the economics literature on risk taking focuses on the individual. We report the results of controlled laboratory experiments that compare behavior between individuals and pairs. Using the Holt and Laury (2002) procedure and a within–subject design, we find no evidence of group polarization, but do find significant ordering effects. Pair choices are con-sistent with a bargaining framework where gender and age impact relative bargaining weights but there is little evidence that conversational leadership or personality does. Finally, the results indicate that pair decisions and partner personality characteristics influence subsequent individual choices.
Economica, 2009
One feature of experimental work is the heterogeneity in risk attitudes and probability distortion displayed by agents. We outline a more general non-expected utility model, which nests the models of Markowitz, and Kahneman and Tversky. The model can generate the standard favourite-longshot bias or a reverse favourite-longshot bias as a result of optimal behaviour. We also provide new empirical evidence on the relationship between Tote and bookmaker returns and confirm that the relationship is not as originally conjectured by Gabriel and Marsden. We outline how our new model can provide an explanation of the relationship that is observed.
A Theory of the Gambling E¤ ect
This paper presents a model for the "gambling e¤ect," i.e., the e¤ect that risky gambles are evaluated di¤erently than riskless outcomes due to an intrinsic utility (or disutility) of gambling. The model turns out to violate stochastic dominance and therefore its primary applications will be descriptive. It sheds new light on empirical observations of risk attitudes and provides new insights into the distinction between risky and riskless utility.
Informal Risk Sharing in an Infinite‐Horizon Experiment*
2009
This paper presents the first laboratory study of risk-sharing without commitment. Our experiment captures the main features of a simple model of voluntary insurance between two agents. In the model, two individuals interact over a potential infinite horizon and suffer random income shocks. Risk-averse individuals have incentives to smooth consumption by making transfers to each other. These transfers being voluntary, only self-enforcing risk-sharing arrangements are possible: transfers can never be so large as to tempt individuals to renege on them. This constraint, when binding, has strong implications for the shape of the constrained optimal risk-sharing arrangement. In our experiment, participants are matched in pairs. Each period, one of them, randomly drawn, receives a given amount in addition to its regular income. After observing both incomes, each person in a pair chooses a non-negative transfer to make to the other person. Two features of the experimental design are crucial. First, it is common information that all pairs will be dissolved at the end of each period with a given probability. Participants are informed when this occurs and randomly re-matched. This replicates the effect of infinite-horizon and discounting in the model. Second, at the end of the experiment, a single period is randomly drawn to count for cash payment. This feature is essential for individuals to care about the utility outcome of each period. We find evidence generally consistent with risk sharing, with most transfers coming from individuals who received h in the period. Moreover, in support of the theory, transfers are much higher with a higher continuation probability and they also are highly correlated with the individual's degree of risk aversion. However, while the model predicts an increase in transfers with ex ante inequality, we observe the opposite effect. This may reflect considerations of identity or group membership.
Sharing or gambling? On risk attitudes in social contexts
Experimental Economics
Decisions under risk are often embedded in a social context that we usually abstract from when studying decision-making in the laboratory. In contrast to that practice, our experiment investigates whether risk-taking is affected by social comparisons. In particular, we focus on situations where some amount of money has to be allocated to two parties: either the amount can be shared, or a random device allocates the entire amount to one of the parties. We find that the social context of the decision matters strongly: When participants are in a disadvantageous initial position compared to the other party, they select the risky option much more often than in a purely individual decision, identical in all other respects. Overall, we find that individuals are relatively more risk-seeking in the socially unfavorable domain than in isolation, in contrast to the favorable one, where we find no or little change in elicited risk attitudes in comparison to an isolated decision.
Preliminary An Experimental Test of Risk-Sharing Arrangements
2004
We investigate risk sharing without commitment by designing an experiment to match a simple model of voluntary insurance between two agents when aggregate income is constant. Participants are matched in pairs. Each period, they receive their income with or without the random component h; after observing own and counterpart income, each person in a pair can decide to make a transfer to the other person. It is common information that there is a given probability that all pairs will be dissolved at the end of each period, with participants re-matched. At the end of the experiment, one period is randomly drawn to count for cash payment. Participants all face the same variance in their income, but do not necessarily have the same mean income. This setting allows us to experimentally test different implications of risk sharing without commitment. In particular, we find strong evidence of risk sharing and reciprocal behavior, where transfers are higher with a higher continuation probabilit...
A simple risk-sharing experiment
Journal of Risk and Uncertainty, 2004
This paper reports on an experiment designed to test whether pairs of individuals are able to exploit efficiency gains in the sharing of a risky financial prospect. Observations from a previous experiment had suggested a general rejection of efficiency in favour of ex post equality. The present experiment explores some possible explanations for this. The results indicate that fairness is not a significant consideration, but rather that having to choose between prospects diverts partners from allocating the chosen prospect efficiently.