The subjects in this experiment make choices for a menu of matched lottery pairs structured so that the "crossover" point to the high-potential-gain lottery is used to infer the degree of risk aversion. In lotteries with normal "real" payoffs of several dollars, most subjects are risk averse and few are risk loving. An increase in payoffs by a factor of twenty yields payoffs that range from $2 to $77 for each choice, and this makes subjects less risk averse when the very high payoffs are hypothetical. In contrast, subjects become more risk averse than for the normal-payoff baseline when the very high payoffs are actually paid in cash. The experiments involved 175 participants at three universities. M.B.A. students and business school faculty were generally risk averse, but slightly less so than undergraduates.

Co-author Charles A. Holt