Before Ryan Oprea caused us to question all lab experimental measures of risky choice behaviour (as noted in yesterday's post), one main concern about experiments in the lab was whether they accurately reflected real-world decisions. The news is somewhat mixed, as I've written about before (see here and here). And that is quite aside from concerns that experimental subject pools made up of (usually undergraduate) students are not representative of real-world populations (see here).
Nevertheless, the last somewhat hopeful point in yesterday's post suggested that real-world behaviour might still be consistent with the experimental results (even if we cannot believe the experiments). On that note, I recently read this 2016 article by Arjan Verschoor, Ben D’Exelle, and Borja Perez-Viana (all University of East Anglia), published in the Journal of Economic Behavior and Organization (open access). They compare a measure of risk preferences estimated from a 'lab-in-the-field' experiment among over 800 farmers in rural Uganda, with measures of risk taking based on their agricultural choices.
Verschoor et al. compare two types of decisions. The first they term 'narrow-bracketed', where:
...the decision-maker does not consider their consequences together with the consequences of other decisions)...
So, narrow-bracketed decisions are those that are quite independent of other decisions, and therefore simpler. In contrast, a decision that is interdependent with other decisions, which Verschoor et al. liken to "portfolio management", is more complex.
Comparing the results of the lab experiment with real-world decisions that are narrow-bracketed (a fertiliser purchase decision) and not (the decision on whether or not to grow and sell crops for the market), Verschoor et al. find that:
Controlling for other determinants of risk-taking in agriculture, we find that risk-taking in the experiment is associated with the relatively straightforward investment decision of fertiliser purchase. However, for more involved livelihoods strategies that call not only on willingness to take risks but also on other attributes of entrepreneurship, viz. moving away from subsistence farming to growing crops for the market (measured in two alternative ways), we find no evidence of an association with risk-taking in the experiment. By contrast, a hypothetical willingness to take large-scale risks, elicited through a questionnaire, is associated with both fertiliser purchase and growing crops for the market (however measured), suggesting that this is a better proxy for entrepreneurship broadly defined.
In other words, when the real-world decision was reasonably straightforward, and reasonably independent of other decisions ('narrowly bracketed') the farmers behaved in line with their risk preferences measured in the experiment. However, when the real-world decision was more complex and inter-related with other decisions, there is little association with the risk preferences measured in the experiment. Verschoor et al. note that:
The decision to buy fertiliser is a straightforward investment decision that raises both the expected profit and the spread of possible profits within an existing livelihoods strategy... Decisions to grow cash crops or to grow for the market more broadly, on the other hand, are complex, multi-dimensional decisions that invoke not only risk preferences but also the nebulous notion of entrepreneurship.
It is interesting to think about these results alongside those in the Ryan Oprea research I discussed yesterday. Oprea found that risk preferences consistent with behavioural economics (specifically Prospect Theory) only arose because of the complexity of the experimental task used to measure them. Verschoor et al. note in the discussion of their underlying theoretical model that:
...prospect theory, which only considers changes to wealth relative to a reference level, correspondence between the two domains [risky choices in lab experiments and risky choices in real life] is assured provided both are narrowly bracketed...
Combining the two sets of results (from Verschoor et al. and Oprea), I infer that perhaps narrowly-bracketed decisions, which nevertheless involve complex choices in the lab, may show preferences consistent with Prospect Theory. Real-world decisions that are narrowly bracketed demonstrate similar preferences. An open question is whether the real-world decisions are consistent with Prospect Theory because of the complexity of those decisions. Verschoor et al. don't give us any steer on that (and neither should they, given that their article was published eight years before Oprea's).
When you move beyond narrow bracketing, adding interdependence with other decisions and therefore even more complexity, then decisions are not consistent with the lab-estimated risk preferences. We don't know whether that makes them inconsistent with Prospect Theory, but I expect it does. Does that mean that adding even more complexity makes decision-makers more rational? Or perhaps, more salience of the decision (or higher stakes of the decision) makes them more rational? It's not simply the real-world context, or the fertiliser decisions would also be affected.
Now of course, I am trying to reconcile just two sets of results from a much larger literature here, and probably going too far in doing so. However, it will be interesting to see where the lab experiments vs. real-world research literature goes next.
Read more:
No comments:
Post a Comment