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Does decision error decrease with risk aversion?

Published online by Cambridge University Press:  14 March 2025

David M. Bruner
David M. Bruner*
Affiliation:
Department of Economics, Appalachian State University, 3106 Peacock Hall, 28607 Boone, NC, USA
*
[email protected]
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Abstract

There is substantial evidence that risky decision-making involves a stochastic error process. The literature has adopted different approaches to address this issue, however, risk preferences are not uniquely identified by the most popular methods; decision error is not predicted to monotonically decrease with risk aversion. This paper reports the results of an experiment that elicits risk preferences to identify risk averse individuals and evaluates the frequency the stochastically dominant of two lotteries is chosen. Risk averse subjects exhibit a strong preference for dominant lotteries. More importantly, violations are consistent with stochastic decision error that decreases with risk aversion.

Keywords

Decision errorRisk aversionStochastic dominanceExperimentC91D81
Type
Original Paper
Information
Experimental Economics , Volume 20 , Issue 1 , March 2017 , pp. 259 - 273
Copyright
Copyright © 2016 Economic Science Association

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Footnotes

This research was undertaken at the University of Calgary Behavioural and Experimental Economics Laboratory (CBEEL). I would like to thank Christopher Auld, John Boyce, Michael McKee, William Neilson, Rob Oxoby, and Nathaniel Wilcox for their many helpful comments and suggestions, as well as participants at the 2009 North American Economic Science Association Meetings where preliminary results from this research were presented.

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