A menu of paired lottery choices is structured so that the crossover point to the high-risk lottery can be used to infer the degree of risk aversion. With "normal" laboratory payoffs of several dollars, most subjects are risk averse and few are risk loving. Scaling up all payoffs by factors of twenty, fifty, and ninety makes little difference when the high payoffs are hypothetical. In contrast, subjects become sharply more risk averse when the high payoffs are actually paid in cash. A hybrid "power/expo" utility function with increasing relative and decreasing absolute risk aversion nicely replicates the data patterns over this range of payoffs from several dollars to several hundred dollars.
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- Department of Economics in the Andrew Young School of Policy Studies
- Experimental Economics Center of the Andrew Young School of Policy Studies
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- Copyright 2005 Department of Economics in the Andrew Young School of Policy Studies and Experimental Economics Center of the Andrew Young School of Policy Studies
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