100%(1)100% found this document useful (1 vote)

441 views5 pagesA few points about the methodology and calculations.

May 08, 2014

Multiple Price List Design Explanation

© © All Rights Reserved

DOCX, PDF, TXT or read online from Scribd

A few points about the methodology and calculations.

© All Rights Reserved

100%(1)100% found this document useful (1 vote)

441 views5 pagesMultiple Price List Design Explanation

A few points about the methodology and calculations.

© All Rights Reserved

You are on page 1of 5

There are four common methods of measuring risk aversion in the field, all of which have

been applied to some extent in a developing country context: Ordered Lottery Selection

(OLS), Multiple Price List (MPL), Titration Procedure, simple investment games.

1

The point

of each method is to elicit the deviance of the respondents utility function from that which

would be expected by Expected Utility Theory. Respondents who are risk-averse will have a

certainty equivalent value (CEV) below the expected monetary value (EMV) of an option and

conversely, those that are risk-loving will have a CEV above the EMV. As an example, if the

choice is between having a fixed amount of money or a 50% chance at 10: someone who is

risk neutral would demand exactly 5 to take the fixed amount option (CEV=EMV=5),

someone who is risk-averse would demand less than 5 (CEV<EMV) to forgo the chance at

10, and someone who is risk-loving would only accept more than 5 (CEV>EMV) to take

that fixed amount over the chance at 10.

The Multiple Price List (MPL) design is promising because it allows for a more accurate

measure of Constant Relative Risk Aversion (CRRA) than OLS, is more robust than

Titration, might be less perceived as gambling as compared to simple investment games, and

has been successfully piloted in field trials in Uganda (Tanaka & Munro, 2014). The original

design of the MPL is given in the seminal paper of Holt & Laury (2002) which has been cited

by over 2,000 subsequent experiments in the literature. All of these subsequent experiments

are similar in nature to the original design of Holt & Laury (2002) with modifications to

allow for time-variance, loss-aversion, and other modified characteristics of the utility

function that may be relevant for the given research question. For simplicity and in order to

make the survey results more comparable to the literature, a version of the design of Tanaka

& Munro (2014) was used and is based on the original MPL design of Holt & Laury (2002).

As shown in Figure 1, Respondents chose between option A or option B. Option A is the safe

option with a 4/4 (100% probability) of yielding 4,000 UGX. Option B is the chance option

with (75% probability) of the left hand value and (25% probability) of the right hand

value. The respondent starts at the top and chooses each time between A or B. A should be

1

Methods informed by conversation with Ben DExelle of University of East Anglia (UEA) at a Methods in the

Field Course conducted by UEA London, 18 May, 2013.

chosen in row #1, while B in row #8 and the switching pointwhere the respondent

switches from only answering A to only answering Bwill allow the researcher to elicit

the respondents risk aversion as measured by the Constant Relative Risk Aversion (CRRA)

parameter.

#

Bag A Bag B

4 red

marbles

3 red

marbles

1 white

marble

Pick a

marble from

A or B?

1

4,000 4,000 2,000

2

4,000 4,500 2,000

3

4,000 5,000 2,000

4

4,000 5,500 2,000

5

4,000 6,000 2,000

6

4,000 7,000 2,000

7

4,000 7,000 3,000

8

4,000 7,000 4,000

NB: pay-outs are in Ugandan Shillings (conversion rate at the time of survey: 4,000UGX 1 GBP)

Figure 1: Example MPL design used for farmer survey in Buikwe, Mukono, and Kayunga districts based

on Tanaka & Munro (2014).

In measuring the degree of a respondents level of risk-aversion or risk-loving, a popular

choice is the Constant Relative Risk Aversion (CRRA) measure. This is the value in the

utility function ()

maximized (i.e. (

)); where

probability

ranges of the CRRA for which the respondents choice in the experiment was optimal

assuming expected utility theory is true. It is easiest to demonstrate the methodology and

results in column 2 of Table 1 below with an example calculation.

Assume a given participant answers A for all choices until row 6, where she switches to B for

that row through the rest of the game (rows 6, 7, 8 see Figure 1). For row 5, she chose the safe

option of a guaranteed (i.e. 100% probability of) 4,000 UGX, which by revealed preference

she must have preferred more than the 75% chance of 6,000 UGX. However, for row 6 she

took the probabilistic option of 75% likelihood of 7,000 UGX and 25% likelihood of 2,000

UGX. Her risk preference can then be calculated as interval between the solutions for given

the two equations (1) and (2) shown below:

(1)

(2)

Solving (1) yields and solving (2) yields . As such, the interval for the actual

risk aversion parameter is given by (as shown in Table 1). It is also easy to

calculate the expected value difference between choice A and choice B at her switching point

of row 6 (see equation (3) below). The expected value of choosing the safe option of 4,000

UGX is 1,750 UGX less than what would be expected by taking the probabilistic option in B

(as shown in Table 1 as well).

() () [ ()] [ ]

(3)

To enhance understanding of the experimental design, Tanaka & Munro (2014) had each row

of the game (like Figure 1) presented at a different table in the experiment room. Thus, when a

participant came in, she would physically sit at a different location to make each choice. She

was also making each choice in isolation, although, the order of the choices was preserved.

Tanaka & Munro (2014) argue this allows the participantwho might be illiterate, elderly,

and with no formal educationto focus on the decision and not get confused by the structure

of the game. Given the low levels of education in impoverished, rural areas, even a simple

game like this requires a great degree of attention and thought to understand fully. Likely,

this simplified and focused setup allowed them to get relatively low irrational response rates

in their experiments.

Table 1: Risk aversion classification based on lottery choices for design in

Figure 1 above

Row of first B

(switching

point)

Range of relative risk aversion

for ()

Expected value

difference at

switch point

([] [])

Risk preference

classification*

ALL B - 500 Irrational

2 125 Very risk-loving

3 -250 Risk-loving to risk neutral

4 -625 Slightly risk-averse

5 -1,000 Moderately risk-averse

6 -1,750 Intermediate risk-averse

7 -2,000 Highly risk-averse

8 -2,250 Very risk-averse

ALL A - - Irrational

MULTIPLE - - Irrational

* Terminology based on Tanaka & Munro (2014)

The third column of Table 1 shows the expected pay-off difference between choosing option

A compared to option B. From the first 2 choices, option A has a higher expected pay out

than option B. Most respondents will choice option A in the first instance and switch to

option B at some point before the final round (8

th

row). Variations of this basic setup abound

in the literature, mostly to fit the research context or simplify the setup; the original risk-

aversion classification from Holt & Laury (2002) is reprinted as a further example in Table 2.

Table 2: Risk-aversion classification based on lottery choices from Holt & Laury (2002)

Works Cited

Holt, C.A. & Laury, S.K. (2002) Risk aversion and incentive effects. The American

Economic Review. 92 (5), 16441655.

Tanaka, Y. & Munro, A. (2014) Regional Variation in Risk and Time Preferences: Evidence

from a Large-scale Field Experiment in Rural Uganda. Journal of African Economies. 23

(1), 151187.

Skip section### Trending

- The Magician's NephewC. S. Lewis
- TangledEmma Chase
- The E-Myth Revisited: Why Most Small Businesses Don't Work andMichael E. Gerber
- Secrets of the Millionaire Mind: Mastering the Inner Game of WealthT. Harv Eker
- Rich Dad Poor Dad: What The Rich Teach Their Kids About Money - That the Poor and Middle Class Do Not!Robert T. Kiyosaki
- After Ever HappyAnna Todd
- The Pout-Pout Fish in the Big-Big DarkDeborah Diesen
- The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and OrganizingMarie Kondo
- The Misadventures of Awkward Black GirlIssa Rae
- The Achievement Habit: Stop Wishing, Start Doing, and Take Command of Your LifeBernard Roth
- Wizard and Glass: The Dark Tower IVStephen King
- Battlefield of the Mind: Winning the Battle in Your MindJoyce Meyer
- Delay, Don't DenyGin Stephens
- Spy School Secret ServiceStuart Gibbs
- RoomiesChristina Lauren
- Truly Devious: A MysteryMaureen Johnson
- The OneJohn Marrs
- New KidJerry Craft
- Midnight in Chernobyl: The Story of the World's Greatest Nuclear DisasterAdam Higginbotham
- With the Fire on HighElizabeth Acevedo
- Daughter of the Pirate KingTricia Levenseller
- Butterface (A Hot Romantic Comedy)Avery Flynn
- The Worst Best Man: A NovelMia Sosa
- A Good Marriage: A NovelKimberly McCreight