Measuring risk aversion among the urban poor in Kolkata, India

Abstract

We examine risk preferences in an urban setting in a low-income developing country with nonstudent subjects by adapting the experimental approach of Holt and Laury (HL; 2002). We conducted 22 group experiments with 404 participants and used in-kind payoffs. The average respondent was ‘risk-averse’ (the midpoint of Constant Relative Risk Aversion (CRRA) intervals among participants was 0.53, roughly in line with most similar studies in poor countries). Like most other studies, we find weak correlations between risk aversion and most socio-economic characteristics. Importantly, a sizeable minority had difficulty understanding the experiment, and participants were influenced by the context in which the experiments occurred (these problems are not unique to our study). Our article adds to a growing literature that suggests that risk aversion elicitation approaches are sensitive to context and cognitive abilities of participants.

Keywords:

• risk aversion
• India
• urban
• experiment

JEL Classification:

• C91
• C93
• D81

Acknowledgements

We thank Glenn Harrison, C. Leigh Anderson and participants of Camp Resources XIII for their useful comments and suggestions. We also thank Sunil Kumar Roy and Margaret Browne for the help during the fieldwork. All errors remain our own.

Notes

¹ Interested readers should consult a longer working paper version of this study (Cook et al. 2009) which discusses this literature, as well as our experimental design, results and conclusions in more detail.

² A more detailed treatment of this section, as well as copies of the experimental script and materials shown to participants, is available at the first author's website: http://faculty.washington.edu/jhcook/research.html.

³ All participants who made 0–2 safe choices are recoded as having made two safe choices, and all participants who made 9–11 safe choices are recoded as having made nine safe choices.