Hypothetical and Real Consequences in Experimental Auctions for Insurance against Low Probability Risks

Abstract

Laboratory experiments have provided useful information about how people behave in risky siluations. In particular, such experiments have allowed for the observation of many deviations from the predictions of expected utility theory. There is some dispute, however, over the effect ofthe use of real versus hypothetical money in these experiments and over the Impact of experience. In this paper we describe auction experiments in which subjects faced a low-probability risk with either hypothetical or real-money consequences and varying amounts of experience. Using hypothetical payoffs resulted in behavior that provides a reasonable qualitative prediction of behavior with real consequences, but that seems to indicate a less diligent attitude toward spending the money as well as less concern about the risk.

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