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Working Papers (2019), ESSEC Business School

How Serious is the Measurement-Error Problem in a Popular Risk-Aversion Task?

PEREZ Fabien, HOLLARD Guillaume, VRANCEANU Radu , DUBART Delphine

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 approxi- mately 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 risk- aversion 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).

PEREZ, F., HOLLARD, G., VRANCEANU, R. and DUBART, D. (2019). How Serious is the Measurement-Error Problem in a Popular Risk-Aversion Task? WP1911, ESSEC Business School.