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Multiple price list design

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.
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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 ¾ (75% probability) of the left hand value and ¼ (25% probability) of the right hand
value. The respondent starts at the top and chooses each time between A or B. A should be

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Methods informed by conversation with Ben D’Exelle 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 point—where the respondent
―switches‖ from only answering A to only answering B—will allow the researcher to elicit
the respondent’s 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 respondent’s 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 ()

for which the probability-weighted sum of utility outcomes is
maximized (i.e. (∑

(

)); where

is the pay-out to the individual () with
probability

. Based on the researchers’ experimental design, they can elicit different
ranges of the CRRA for which the respondent’s 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 participant—who might be illiterate, elderly,
and with no formal education—to 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), 1644–1655.

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), 151–187.