NANCY Seminar – Paolo CROSSETTO (GAEL)

Event details :

Title: Convergent and External Validity of Risk Attitude Measurements: The Roles of Measurement Error and of Ignorance of Lottery Elements

Abstract: Risk elicited in the lab shows severely limited convergent and external validity — a finding known as the ’risk elicitation puzzle’. One potential explanation relies on measurement error: be it because of fuzzy preferences, cognitive uncertainty, or because of errors induced by novel and sometimes complex settings, subjects could submit noisy responses to our tasks and questionnaires. Another potential explanation has to do with risk perception, as subjects might hold a different representation than economists of the construct of “risk”. Risk elicitation tasks that force them to choose in an information-rich, surprise-free experimenter-defined context could induce a mismatch with decisions outside the lab in ambiguous or deeply uncertain settings. The subjects might find that the lottery choices we feed them are not “risky” in the sense their daily decisions are. In this talk we present the results of two related experimental campaigns, one focused on measurement error, and another on different models of uncertainty about lottery elements (risk, ambiguity, deep uncertainty).

In the first campaign, we expose subjects to 4 different risk elicitation methods (Holt-Laury, BRET, Investment Game and a loss aversion multiple price list) and two widespread risk-taking questionnaires (DOSPERT and SOEP) in a lab session, and then follow subjects’ behavior for 14 days using a daily reconstruction method (DRM), whereby subjects keep a personal journal of their activities and decisions involving risks over 14 days. In the DRM, subjects are asked to report every day if they faced risky situations, and if so which was their decision; they are further asked to assess the perceived riskiness of the situation and the perceived level of risk taken with their decision. During the same 14 days, subjects answer to the tasks 7 times (on even days) and to questionnaires 7 times (on odd days). The rich data we collect allows us to asses test-retest reliability, convergent and external validity for each subject over time; and to aggregate observations to check whether smoothing out measurement error can account for a part of the “risk elicitation puzzle”, and how big a part.

In the second campaign, we recruit again the same subjects, for which we have rich risk-taking data in the lab and in their daily lives, and repeatedly ask them to choose between a safe and a risky option, of which, to start with, they don’t know anything. They are then gradually provided information about the risky option. At each of five distinct steps of information acquisition — sampling, being told the set of outcomes, thus moving into ambiguity territory, sampling again, then being told about the full set of probabilities, hence moving under risk — subjects are asked to declare the perceived riskiness of the risky option and to choose between the two. We collect data for risky options encompassing losses, skewness, a varying number of outcomes, and differences in variance.

This design allows us to map external validity (correlation with the lab & field measures previously collected) to the degree of ignorance of lottery elements (deep uncertainty, ambiguity, risk) and to the perceived riskiness thereof. It allows us to identify which theoretical construct (i.e., which stage of the information process) provides a better representation of the subjects’ decision process when compared with data on real-life risk taking. It also allows us to see which element of a lottery (variance, skewness, number of outcomes, losses) yields higher perceived risk, and how ignorance translates to safer choices.