European Business Schools Librarian's Group

ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School

No WP1911: How Serious is the Measurement-Error Problem in a Popular Risk-Aversion Task?

Perez Fabien, Hollard Guillaume, Vranceanu Radu () and Dubart Delphine ()
Additional contact information
Perez Fabien: ENSAE
Hollard Guillaume: Ecole Polytechnique
Vranceanu Radu: ESSEC Research Center, ESSEC Business School, Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
Dubart Delphine: ESSEC Research Center, ESSEC Business School, Postal: ESSEC Research Center, BP 105, 95021 Cergy, France

Abstract: This paper uses the test/retest data from the Holt and Laury (2002) experiment to provide estimates of the measurement error in this popular risk-aversion task. Maximum likelihood estimation suggests that the variance of the measurement error is approximately equal to the variance of the number of safe choices. Simulations confirm that the coefficient on the risk measure in univariate OLS regressions is approximately half of its true value. Unlike measurement error, the discrete transformation of continuous riskaversion is not a major issue. We discuss the merits of a number of different solutions: increasing the number of observations, IV and the ORIV method developed by Gillen et al. (2019).

Keywords: ORIV; Experiments; Measurement error; Risk-aversion; Test/retest

JEL-codes: C18; C26; C91; D81

20 pages, September 2019

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