Experimental Economics Assignment II
Econ 430/530, Spring 2012
Due March 14th, Wednesday
Referring to the principles of inducing preferences (dominance etc.—see slides on
methodology), and the idea of control, justify or criticize each of the suggestions of the students.
Are there any suggestions you would make, or problems that you see with this experiment?
Note about Problem 2 below: What I mean by k is a measure of how high monetary incentives
are in the experiment. You can think of that as, for example, the number of points that are
accumulated in the experiment, you multiply it by k to find the TL amount subjects get. The
higher the k, the stronger the monetary incentives. Undergrads can give a verbal answer to this
question--grads should try to write a simple theoretical model.
c) What do the risk-aversion experiments in Holt’s book (Chapter 4) suggest about using real vs.
hypothetical payoffs? In particular, some experiments comparing hypothetical versus real
payoffs in risk elicitation tasks have found that the elicited risk-aversion is higher with real
money payoffs. Interpret this result in the light of controlling preferences under monetary
incentives—what unobserved factors in people’s preferences might be inducing such differences
between real and hypothetical? What might be the reason why I make more risky choices when
things are hypothetical? How does the difference change with how large the stakes are?
d) (Grads only): This is an open-ended question with no right or wrong answer, just want to hear
your thoughts: Give one (or more) example(s) of economic contexts where we might be
interested in knowing the risk-aversion parameters of individuals. Now suppose I am running an
experiment that is not directly related to risk, but I would like to have information on risk
preferences (e.g. an auction experiment), and decided to use a Holt-Laury task at the end of that
experiment. Do you think that’s a good idea? Can you think of anything that I need to be careful
about in constructing the payoffs for the Holt-Laury lottery table? Do you have any criticisms
about the procedure?
Problem 4 (Prospect Theory/Endowment Effect):