Harrison, Glenn W.2; Martínez-Correa, Jimmy1; Swarthout, J. Todd3
1 Department of Economics, Copenhagen Business School2 Robinson College of Business, Georgia State University3 Georgia State University
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 toward risk neutrality. This striking result generalizes to the case in which subjects make several lottery choices and one is selected for payment.
Journal of Economic Behavior and Organization, 2013, Vol 94, Issue October, p. 145-159