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In the paper, the authors are interested in finding out the degree of risk aversion among people using a set of paired lottery choices. This is in light of the fact that few experiments provide guidance on how risk aversion should be modeled. The primary research question addressed by the authors is whether it is possible to measure the degree of risk aversion among people using real and hypothetical incentives.
The authors conduct an experiment in order to establish the importance and nature of risk aversion using a wide variety of real and hypothetical payoffs. The study also uses inferences from previous studies conducted by other authors on the same subject of risk aversion.
The experiment in the study is carried out using subjects from Georgia State University, the University of Miami, and the University of Central Florida. The group included undergraduate students, MBA students and students from business school. There were also post experiment questionnaires that were given to a random group of men and women of all ages, professions and races. The authors also present different variables in the experiment. They show background, constant, primary and uncontrollable variables that were taken into consideration during the experiment; one of them being the amount of payoffs. The experiment design is completely randomized as subjects of the experiment are not chosen using any strict criterion.
In the experiment the point where most subjects crossed over to the high risk lottery was used as a benchmark to show the extent of risk avoidance. The effect of high payoffs was checked by multiplying the payoffs by factors such as 20, 50 or 90. Option A in the experiment had low payoffs of $ 2 or $1.60 while Option B which was the riskier option that had payoffs of $ 3.85 or $ 0.10. The results showed that the subjects who crossed over from option B to option A never returned. This was especially after the probability of winning payoffs under option B increased. There was also very little risk loving attitude when the high payoffs were only hypothetical. The post experiment questionnaires also revealed that men were more risk averse than women and variables such as those of race, academic qualifications and age did not have any effect on the degree of risk aversion. The amount of income also slightly influenced the extent of risk avoidance.