The main research question of this paper is how an increase in payoff impact risk

aversion level. The paper hypothesizes that an increase in payoff should increase the degree of
risk aversion. Several academics have explored this area, however there’s still a concern in their
experimental model which the assumptions are somewhat unrealistic. For example, some
papers assume that people exhibit constant relative risk aversion for calculation convenience
purpose but actually people may not have constant relative risk aversion, and this may distort
the results. Consequently, this paper tries to fill the hole of existing papers in determine human
behavior and their attitude towards the risk.
The experiment is conducted by using simple lottery choices in both real and
hypothetical payoff, starting with low payoff level and increasing the scale by 20,50 and 90
times the low payoff level. To fill the void in existing academics paper, the experiment assumes
people have nonconstant relative risk aversion, as the payoff increases the choice pattern can
be changes. There are conditions that subjects need to comply to ensure validity and
comparability of the model. For controlling the wealth effect, subjects are required to comply
to the condition to give up what they earned in the first low payoff task to participate in high
payoff task. Moreover, in hypothetical task, subjects need to acknowledge that they won’t get
paid. This feature avoids potential willingness to accept bias.
In total, there are 212 subjects. 175 subjects are for low payoff and 20 times treatment,
which these subjects came from 3 different universities. The rest of the subjects are for high
payoff condition and they only came from Georgia state university. While conducting the
experiment, subjects’ demographics and academic background are being ignored. The
experiment did not control gender, age, ethnicity, education and income level of these subjects.
Subjects are required to choose between two lottery choices, A and B, which B is the
riskier option. There are 4 tasks in total. First, subjects choose A or B for each of the 10 paired
lottery choices consider that the selected choice can randomly got picked after and will be the
earnings for option selected. Second task is to select choices from 20 times hypothetical payoff
while selection from 20 times real payoff is the third task. Last task returns to the original low
payoff choices. The outcome of each task is determined before the next task begin.
Additionally, high hypothetical payoff task needs to be conducted before the real payoff one, to
avoid bias.
After obtained the data from the lottery choices in the first part of the experiment. The paper
further seeks to predict human risk behavior through the use of utility function. The analysis has
investigate behavior of the subjects towards risk as payoff increases by determine the number of
safe choices which subjects deciding to choose. If the safe choice increases together with payoff,
there is an indication of increasing relative risk aversion. This can be link with utility model.
Simple utility function able to provide a fair explanation for risk aversion behavior, but it doesn’t
work with all payoff level. There is an indication of Rabin critique. The claim here is that risk
aversion over small gambles implies absurd amounts of risk aversion over large gambles. Hybrid
power expo utility function can be estimated to show 2 core elements when explaining people
risk behavior in the wide range of payoff stakes. First element is increasing relative risk aversion
which capture the effect between payoff and investors. Second element is decreasing absolute
risk aversion that avoid absurd amount of risk aversion in high stakes gamble.

The construction of the hybrid power expo function or it also called 3-parameter model starts
by adding the noise elements or mew into a probabilistic choice function. This noise represent
decision making errors and it help in determining whether the large increase in risk aversion as
payoff increase is the effect of diminished noise or not. However, this probabilistic choice
function seems to only work under constant relative risk aversion assumption and only in
normal payoff level. The second and third functional form is further introducing the concept of
relative risk aversion and absoluter risk aversion. Hybrid power expo function, which is the
second model include constant relative risk aversion and absolute risk aversion while the third
parameter model represents Arrow Pratt index of relative risk aversion. When r and alpha in
model 3 is positive figure, the utility function exhibits increase relative risk aversion and
decrease absolute aversion. This 3-parameter model is able to predict behavior from low payoff
to high payoff range.

Alpha is absolute risk aversion coefficient

lowercase r is relative risk aversion

Small u is noise parameter that captures insensitivity of choice probabilities to payoff

lowercase r is relative risk aversion