CLTS Working Paper on Endowment Effects and Loss Aversion in the Risky Investment Game

The paper "Endowment Effects and Loss Aversion in the Risky Investment Game" written by Stein T. Holden and Mesfin Tilahun is now published as a CLTS Working Paper.

CLTS Working Paper on Endowment Effects and Loss Aversion in the Risky Investment Game

CLTS WP 1/20

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CLTS WP 1/20
The paper is published as a CLTS Working Paper and can be downloaded here.

Abstract
The risky investment game of Gneezy and Potters (1997) has been a popular tool used to estimate risk tolerance and myopic loss aversion. We have assessed whether a simple one-shot version of this game that is attractive as a simple tool to elicit risk tolerance among respondents with limited education, can lead to biased estimates of risk aversion due to endowment effects. We use a field experiment with a pool of young business group members with limited education to test for the potential bias associated with the initial endowment allocation.

We find a highly significant endowment effect which may explain low investment levels and exaggerated measures of risk aversion where this game has been used to estimate risk aversion. We develop and test a more balanced version of the risk investment game and demonstrate that it gives less bias due to endowment effects than the standard design and a full risk design that creates an endowment effect in the opposite direction, indicating that loss aversion may not be the primary cause of the endowment effect.
Published 16. January 2020 - 21:15 - Updated 16. January 2020 - 21:15