Rethinking elicitation methods in examining the effects of domain and context on individual preferences under risk and ambiguity

This paper examines preferences across domains and contexts under conditions of risk and ambiguity and estimates the effect of attributes of the prospects on individual preferences. The main contribution of this paper is that it examines preferences using prospects with continuous distributions—a deviation from the widely used gambles with discrete probabilities. The argument put forward in this paper is that this design is at least as realistic of many real-life situations and easier to comprehend. Data were obtained from field experiments where the tasks presented to subjects were framed as gain, loss and mixed and were not exclusively monetary. The findings show that risk preferences are context dependent, implying that the argument of risk-taking being a stable personality trait is untenable. Risk (resp., ambiguity) preferences differ within and between domains. Subjects are risk-avoiding and ambiguity avoiding in the gain domain and the reverse in the loss domain. An increase in the difference between the means of the smaller and larger variance prospects increases the preference for the larger variance prospect under risk but not under ambiguity. Stake orientation with regard to which ends of the prospects are bound at zero was crucial in subjects’ decisions—an important finding not observed in discrete gamble experiments.