ABSTRACT
Holt and Laury introduce a risk elicitation mechanism, providing rules and procedures for decision-makers who are asked to make a sequence of choices between pairs of lotteries in an ordered table of binary lotteries. In their mechanism, a theoretical agent will switch their choice once from the higher variance lottery to the lower variance lottery. The theoretical switching point implies a range of risk coefficients for a subject who is assumed to have the same class of preferences and uses the same decision rule as the theoretical agent. Holt and Laury use their mechanism in a sequence of experiments to measure risk coefficients as they vary payoff size and whether the payoffs are real or hypothetical. The authors find that subjects exhibit increasing risk aversion as the scale of real payoffs increases. By comparison, inferred risk aversion does not increase when the scale of hypothetical payoffs increases.
