WP 2012-02 Inducing Risk Neutral Preferences with Binary Lotteries: A Reconsideration

Published in 2013 in Journal of Economic Behavior & Organization, Volume 94.

AUTHORS: Glenn W. Harrison, Jimmy Martinez-Correa, J. Todd Swarthout

ABSTRACT. We evaluate the binary lottery procedure for inducing risk neutral behavior. We strip the experimental implementation down to bare bones, taking care to avoid any potentially confounding assumptions about behavior having to be made. In particular, our evaluation does not rely on the assumed validity of any strategic equilibrium behavior, or even the customary independence axiom. We show that subjects sampled from our population are generally risk averse when lotteries are defined over monetary outcomes, and that the binary lottery procedure does indeed induce a statistically significant shift towards risk neutrality. This striking result generalizes to the case in which subjects make several lottery choices and one is selected for payment.