Center for Advanced Management

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Prof. Terrance Odean (University of California, Berkeley)


Datum: 30.05.2018

Zeit: 16:00 – 17:30 Uhr

Ort: Ludwigstraße 28, Room 211b

Titel: "Easy Money, Cheap Talk, or Spuds”


“Small payments to participants in economics experiments are intended to incentivize actions and choices. For example, performance based payments should increase participants’ focus and effort. If participants view endowments they receive in the experiment as fungible with their own money, those who are risk averse in their day-to-day lives should behave with similar risk averse in the lab. We conduct two experiments each with the same two treatments. In the first treatment participants are given endowments of small monetary stakes; in the second participants earn their small stakes by completing manual tasks such as peeling potatoes. In the first experiment, participants choose between their stake and a menu of risky lotteries. Participants in the endowed stakes treatment choose riskier lotteries than participants in the earned stakes treatment. A quarter of the endowed stakes treatment group even choose lotteries with negative expected returns; no one in the earned stakes group does so. In the second experiment, participants choose between receiving their entire stake immediately and a menu of options for receiving some of their stake in the future with varying implied interest rates. The endowed stakes participants exhibit more impatience than do the earned stakes participants. In addition to laboratory experiments, we also conduct an online between-participants survey in which we ask respondents how they would behave in risky choice experiments if they were given endowed stakes and if they had earned stakes peeling potatoes or if their own money were at risk. Respondents report that they would take the most risk with endowed stakes, less risk with earned stakes, and yet less risk with their own money. The level of risk survey participants anticipate taking with their own money is similar to the risk laboratory participants take in the earned stakes treatment and much lower than the risk taken by laboratory participants in the endowed stakes treatment. Our results indicate that freely given endowments do a poor job of inducing risk-aversion in laboratory experiments. When risk aversion is critical to an experiment, researchers should make participants earn their stakes. And to confirm the external validity of experiments, researchers should consider ask people hypothetical questions about how they would behave in the situations being modeled.”