Behavioural W3

Question 1

what is the difference between risk and ambiguity

Answer 1

known probabilities vs unknown probabilities

Question 1

prospect definition

Answer 1

list of consequences with associated probabilities

Question 2

what does expected value assume

Answer 2

people base their decisions only on how much money they could receive

Question 3

certainty equivalent definition

Answer 3

the guarenteed value that an individual would consider equivalent to receiving an uncertain payoff

Question 4

how can you quantity how risk averse

Answer 4

1. the lower the certainty equivalent, the more risk averse.
2. the higher the risk premium, the less risk averse.

Question 5

describe preferences over prospects

Answer 5

1. p>q: prospect p is strictly preferred to prospect q.
2. p greater than or equal to q: p is weakly preferred to q.
3. p=q: indifference between p and q.

Question 6

what is the formula for expected value and what is the solution to it

Answer 6

EV= Sum of (pi + xi).
Translate £ into utilities: EU=Sum of (pi + u(xi)).

Question 7

what is the risk premium

Answer 7

RP = EV - CE.

Question 8

How to measure Absolute risk aversion

Answer 8

rA(x) - U^ii(x) / U^i(x)

Question 9

How to measure relative risk aversion

Answer 9

rR(x) = - U^ii(x)x / U^i(x)

Question 10

complex definition

Answer 10

estimate parameters of a utility function using functional form assumptions.

Question 11

simple defintion

Answer 11

aim to score individuals on how willing they are to take risks.

Question 12

revealed preferences definition

Answer 12

infers participants’ risk preferences from their choices in real life situations.

Question 13

self-reported preferences definition

Answer 13

use participants’ stated attitudes about their risk preferences - surveys.

Question 14

what is BART and pros and cons

Answer 14

Inflate a balloon, each pump is a reward, if it pops you lose it all.
For: easy to understand, simple+realistic and shown to correlate with real-world risky behaviour such as gambling.
Against: risk preferences may not carry across domains (financial), computer and multiple trials required.

Question 15

What is a questionnaire and pros and cons

Answer 15

Rating something /10 for example.
For: simple, domain specified and easy to understand.
Against: Un-incentivised.

Question 16

what is the Gneezy and Potters method and pros and cons

Answer 16

Captures incentivised risk attitudes in financial context. Receive some money, and choose how much to invest in risky options and how much to keep.
For: single decision task: good for use in the field, simple to understand.
Against: One-shot, inconsistency is difficult to identify. Can’t distinguish between risk neutral and risk seeking.

Question 17

What is Eckel and Grossman method, pros and cons

Answer 17

Risk coefficient r of the utility function can be derived.
For: single decision task: good for use in the field, simple to understand.
Against: One-shot, inconsistency is difficult to identify. Can’t distinguish between risk neutral and risk seeking.

Question 18

What is Multiple Price List (MPL) method

Answer 18

Incentivised choices in list of binary decisions between lotteries. Switch from A to B used as a measure of risk preference.
For: Close intervals for risk preference coefficients, range of risk preferences can be accounted for.
Against: Harder to understand for participants, longer procedure and multiple switching can make interpretation difficult.

Question 19

How to choose which method to use

Answer 19

1. Research questions.
2. Resources.
3. Study population.