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Abstract:

DARP Paper
Perceptions of Risk: an Experimental Approach using Internet Questionnaires, (published in Research on Economic Inequality, vol. 12 (2004), pp. 99-132).
Frank A Cowell and Guillermo Cruces May 2003
Paper No' DARP 070:
Full Paper (pdf)

JEL Classification: C13; D63


Tags: inequality; risk; experiment; transfer principle; mean-preserving spread.

Building on previous studies on perceptions of inequality, welfare and risk we investigate the structure of individuals' rankings of uncertain prospects in terms of risk and their relationship to individual preferences. We examine three interlinked propositions that are fundamental to the standard economic approach to risk: (i) that rankings by risk are simply the reverse of ranking by preference over distributions with a given mean; (ii) that risk-rankings respect the principle of mean-preserving spreads; (iii) that risk-rankings are independent of whether the individual is personally involved in the gains/losses associated with the uncertain prospects. To do this we use a set of questionnaires implemented through the Virtual Laboratory, a novel experimental setting for the study of normative issues in experimental economics. The results from the questionnaires provide an evaluation of the similitude between individual perceptions of risk and theoretical axioms. They also help identify the individual characteristics that might affect such perceptions.