The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

The purpose of Plott and Zeiler (2005)—henceforth, PZ—was to investigate whether previously published experiments using consumption goods such as mugs and candy bars to measure gaps between willingness to pay (WTP) and willingnessto-accept (WTA) support endowment effect theory (EET). Our results demonstrate that the gap for commodities can be turned on and off by implementing procedures designed to control for subject misconceptions about the value elicitation procedures. Following experiments traditionally used to demonstrate the endowment effect, we used mug valuations to test EET. We used lottery rounds only to provide our subjects with paid practice using the value elicitation device prior to employing that device to elicit subjects’ mug valuations. In a footnote, we report evidence of contamination in the lottery data that rendered it inappropriate for our purposes (PZ 2005, fn. 15). Our footnote summarized the details of misconceptions reported in a data supplement provided to all who request our lottery data. The supplement was not referenced in our paper, so we make it available as an online Appendix to our Reply. 1 Andrea Isoni, Graham Loomes, and Robert Sugden (2011)—henceforth, ILS—use experimental procedures similar to ours and observe, just as we did, no gap in mug valuations. ILS claim that our 2005 paper is misleading and has misled researchers. They are concerned that our paper produces, and has been interpreted as producing, a set of procedures sufficient to remove all gaps, including gaps in lotteries. To justify their concern they focus on the wording of our abstract and overlook the context of paragraphs from which they quote sentences to support their thesis. The result is what we consider to be a misleading picture of the content of our paper and the facts that we report, namely that mug gaps disappear after we implement controls for misconceptions and that none of our data provides support for EET. We want to emphasize that our focus was on EET and not on more general theories of prefer ence formation, reference effects and decision processes that have emerged in the literature more recently and might explain our results. 2 In Section I, we demonstrate

The Willingness to Pay-Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations

Reference-dependent preferences have been well accepted in decision sciences, experimental economics, behavioral finance, and marketing. However, we still know very little about how decision makers form and update their reference points given a sequence of information. Our paper provides some novel experiments in a financial context to advance the understanding of reference-point formation over time. Our subjects' reference price is best described as a combination of the first and the last price of the time series, with intermediate prices receiving smaller and nondecaying weights. Hence, reference prices are not recursive. We provide a parsimonious formula to predict the reference points, which we test out-of-sample. The fit of the model is reasonably good.

This paper was accepted by George Wu, decision analysis.

Reference-Point Formation and Updating

Decisions with uncertain outcomes are often made by one party in settings where another party bears the consequences. Whenever an individual is delegated to make decisions that affect others, such as in the typical corporate structure, does the individual make decisions that reflect the risk preferences of the party bearing the consequences? We examine this question in two simple settings, lottery choices and sealed-bid auctions, using controlled laboratory experiments. We find that when an individual makes a decision for an anonymous stranger, there is a tendency to exhibit less risk aversion. This reduction in risk aversion is relative to his or her own preferences, and it is also relative to his or her belief about the preferences of others. This result has significant implications for the design of contracts between principals and agents.

/pdf/are-you-risk-averse-over-other-people-s-money-b1k9384549.pdf

Are You Risk Averse over Other People's Money?

The belief that knowledge actually expands when it is shared has been deeply rooted in the mainstream knowledge management literature. Although many organizations and managers expect employees to share their knowledge with their colleagues, this does not always occur. This study aims to use the conservation of resources theory to explain why employees who experience greater time pressure are more likely to engage in knowledge hiding; it further considers how this behavior may be moderated by these employees’ prosocial motivation and perspective taking.,The paper uses quantitative multi-study research design as a combination of two-wave field study among 313 employees at an insurance company and a lab experimental study.,In the field study (Study 1), the authors find that perceived time pressure is positively related to knowledge hiding. Furthermore, this relationship is moderated by prosocial motivation: employees who perceive greater time pressure hide knowledge only when they are low in prosocial motivation. An experiment (Study 2) replicates these findings, and finds that perspective taking mediates the moderating effect of prosocial motivation on the relationship between time pressure and knowledge hiding.,Despite its many contributions, the present research is also not without limitations. Study 1 was a cross-lagged sectional field study with self-reported data (although the two-wave design does help alleviate common-method-bias concerns). Causality concerns were further alleviated by using additional experimental study.,The paper highlights important reasons why people hide knowledge at work (because of experienced time pressure) as well as identifies two interlinked potential remedies (prosocial motivation and perspective taking) to reduce knowledge hiding.,This paper contributes to expanding nomological network of knowledge hiding construct by extending the set of known antecedents and contingencies.

/pdf/tell-me-if-you-can-time-pressure-prosocial-motivation-dzd5tu8qzn.pdf

Tell Me If You Can: Time Pressure, Prosocial Motivation, Perspective Taking, and Knowledge Hiding

We explore situations in which a decision maker bears responsibility for somebody else’s outcomes as well as for her own. We study such choices for gains and losses, and for different gain probabilities. For 50–50 lotteries over gains we find that being responsible for somebody else’s payoffs increases risk aversion. In the loss domain, on the other hand, we find significantly different behavior relative to gains, with slightly more risk seeking under responsibility. In a second experiment, we replicate the finding of increased risk aversion for large probabilities of a gain, while for small probability gains we find increased risk seeking under conditions of responsibility relative to large probabilities. This discredits hypotheses of a ‘cautious shift’ under responsibility, and may indicate an accentuation of the fourfold pattern of risk attitudes usually found for individual choices.

https://www.econstor.eu/bitstream/10419/71135/1/74036992X.pdf

Responsibility Effects in Decision Making under Risk

We study the effects of time pressure on risky decisions for pure gain prospects, pure loss prospects, and mixed prospects involving both gains and losses. In an experiment we find that risk aversion for gains is robust under time pressure whereas risk seeking for losses turns into risk aversion under time pressure. For mixed prospects, subjects become more loss averse and more gain seeking under time pressure, depending on the framing of the prospects. The results suggest the importance of aspiration levels under time pressure. We discuss the implications of our findings for decision making situations that involve time pressure.

Tempus Fugit: Time Pressure in Risky Decisions

We study the effects of time pressure on risky decisions for pure gain prospects, pure loss prospects, and mixed prospects involving both gains and losses. In two experiments we find that time pressure has no effect on risk attitudes for gains, but increases risk aversion for losses. For mixed prospects, subjects become simultaneously more loss averse and more gain seeking under time pressure, depending on the framing of the prospects. The results suggest the importance of aspiration levels, and thus the overall probability to break even, under time pressure. We discuss the implications of our findings for decision-making situations that involve time pressure.

/pdf/tempus-fugit-time-pressure-in-risky-decisions-51brzpm5y4.pdf

Risk-taking for others under accountability

https://epub.ub.uni-muenchen.de/11743/1/Kocher_Pahlke_Trautmann_2010.pdf

Julius Pahlke

Papers

Responsibility Effects in Decision Making under Risk

Tempus Fugit: Time Pressure in Risky Decisions

Tempus Fugit: Time Pressure in Risky Decisions

Risk-taking for others under accountability

An experimental study of precautionary bidding