Vecon Lab Investment Decision Experiment: Introduction

This program gives each participant one or more choices between investing in a safe or a risky asset. For the default settings, variations in the magnitude of the high payoff for each dollar invested in the risky lottery can be used to make inferences about the degree of risk aversion. The setup form lets you specify the sure return for each dollar invested in the "safe asset," and the high and low returns for each dollar invested in the risky asset, along with the associated probabilities. The amounts invested in the risky asset will be inversely related to risk aversion. The implied coefficients of constant relative risk aversion are automatically calculated for each decision and are reported on the summary results page. For an explanation of this procedure, see Charness and Genicot (2004), "An Experimental Test of Risk Sharing Arrangements," (UCSB Working Paper).

The experiment can be used to instigate a class discussion of the most basic portfolio choice problem in finance, and the related notions of risk neutrality and risk aversion. In class experiments with hypothetical payoffs, participants tend to be risk neutral or slightly risk averse.

Vecon Lab - September 20, 2020