LITERATURE REVIEW

Article first -

Summary

Topic - Risk Aversion expected utility theory

In this article on the expected utility theory of risk aversion Harrison (2009), G.W. (2009),
Rustom (2009), look at that neither expected utility of wealth nor income, but rather use an
expected utility of consumption model to estimate coefficients of relative risk aversion.
Harrison(2009), G.W.(2009), Rustom(2009)use survey data on bet choice to risk game to
calculate rural Paraguayans’ coefficients of risk aversion, Harrison(2009), G.W.(2009),
Rustom(2009) did some assumptions as well, that Harrison(2009), G.W.(2009), Rustom(2009)
assumes that player must spend all his winnings in pone day, estimate reasonable coefficients,
also the assumption of no savings, Harrison(2009), G.W.(2009), Rustom(2009) alternative
assumption that player decides in each period how much of his income consume and how much
to save

Harrison (2009), G.W. (2009), Rustom(2009 ) surveyed 223 rural households in Paraguay, they
set some rules of games as well, Harrison(2009), G.W.(2009), Rustom(2009) estimated some
risk aversion parameters like risk aversion under the assumption of no saving, risk aversion
under the saving, risk aversion under the background risk, risk aversion under the expected
utility of wealth.

In that paper Harrison(2009), G.W.(2009), Rustom(2009 )use choices made in modest-stakes

risk experiments by rural Paraguayans whose income levels were known assumed a model of
expected utility of consumption. Harrison(2009), G.W.(2009), Rustom(2009 ) says if farmers can
save their winnings the implied coefficients of relative risk aversion are absurdly high,
Harrison(2009), G.W.(2009), Rustom(2009 )said on other hand the same coefficients calculated
over gains rather then final income are quite reasonable. Harrison(2009), G.W.(2009),
Rustom(2009 ) said that players isolate the risky decision in the game considering their final
wealth status
Gertner (1993) considers participants who assess the likelihood of picking a higher-ordered card
from a deck without replacing a given card in his research of the game show 'Card Sharks.'
Beetsma and Schotman (2001) examine the game show 'Lingo,' in which competitors are
required to determine the probability of taking balls from an urn without replacing them. In these
instances, the ability to compute probabilities may obstruct risk preferences, which may explain
why Gertner (1993) and Beetsma and Schotman (2001) acquire relatively high coefficients of
relative risk aversion. Numerous studies have analysed data from several editions of the same
game. This is the first work that we are aware of that proposes a fully structural estimation of this
natural experiment. Andersen, Harrison, Lau, and Rutstrom (2008) present an excellent
description of the methodologies used and the results gained, as well as a generic estimating
strategy for this type of games. These succeeding investigations vary in terms of the alternative
choice theoretic approaches analysed and the methodology used. Andersen et al. (2006b),
DeRoos and Sarafidis (2009), Mulino, Scheelings, Brooks, and Faff (2009) all employ our
structural approach of estimating the full dynamic choice model by maximum likelihood,
whereas Post, Van den Assem, Baltussen, and Thaler (2008), Blavatskyy and Pogrebna (2010),
and Deck, Lee, and Reyes (2006) all employ a reduced-form approach. Additionally, when
compared to non-game circumstances, the experiment in this study demonstrates significant
advantages.

Consider the work of Jullien and Salanié (2000), which employs racetrack wagers to estimate
risk preferences. Due to a lack of information on individual bettors, they are forced to take a
representative agent strategy. We are able to identify a few significant individual features in our
sample and thereby account for risk preference heterogeneity. Income is the most critical of
these, as it enables us to maintain a consistent relative risk aversion utility. Allowing for
unobserved variability has several advantages, as Cohen and Einav demonstrate (2007). They
propose an interesting use of this methodology in their paper, but one that needs accounting for
adverse selection and moral hazard, which significantly complicates the calculation.

This and other studies, such as Cicchetti and Dubin (1994), use more intricate lotteries and
payoffs several orders of magnitude less than the ones we investigate in this study. The lottery's
nature may be problematic, as individuals are supposed to make insurance purchases based on
their knowledge of the precise probability of a vehicle accident or telephone line failure. Perhaps
a 50-50 lottery is a simpler problem for the individual to consider than two cash awards. The
magnitude of the lottery stakes also presents an issue for these investigations, as insurance
deductibles and telephone line breakdowns rarely exceed a few hundred dollars. Such tiny
wagers simply do not allow for the tracing of major amounts of income's value.

Reference -

Harrison, G.W., Rutström, E.E. Expected utility theory and prospect theory: one wedding and a
decent funeral. Exp Econ 12, 133 (2009). https://doi.org/10.1007/s10683-008-9203-7

Andersen, Stefen, Glenn W. Harrison, Morten Igel Lau, Elisabet E. Rutstrom (2008), “Risk
Aversion in Game Shows,” in J.C. Cox and G.W. Harrison (eds.), Risk Aversion in Experiments
Bingley, UK: Emerald, Research in Experimental Economics, Volume 12.

Andersen, Stefen, Glenn W. Harrison, Morten Igel Lau, Elisabet E. Rutstrom (2006b), “Dynamic
Choice Behavior in a Natural Experiment,” Working Paper, Department of Economics,
University of Central Florida.

Beetsma, Roel M. W. J., and Peter C. Schotman (2001), “Measuring Risk Attitudes in a Natural
Experiment: Data from the Television Game Show Lingo,” T