Inferring risk attitudes from certainty equivalents: Some lessons from an experimental study

This paper investigates experimentally whether certainty equivalents qualify as useful indicators of individual risk aversion. Relying on the Vickrey auction technique to obtain an unbiased indicator of individual reservation prices for certain lotteries, we found considerable deviation of valuations over time. We attempt to explain these findings, and propose that individuals "observe", with some noise, their own attitude toward risk. Monte Carlo simulation was used to derive an error variance that accounted for the degree of reliability present in our data. Our results cast doubt on the usefulness of individual certainty equivalents as meaningful indicators of individual risk attitudes. (C) 1997 Elsevier Science B.V.