| Many decisions we face are characterized by risk or uncertainty---we must make choices prior to knowing the outcome. However, we often know the potential outcomes and even have some idea regarding the likelihood of each. While there are similarities in how people respond to risky decisions, there are also differences related to factors like gender and culture. Understanding these similarities and differences can help our understanding of a range of economic phenomena. For example, why entrepreneurship flourish in some countries while it stagnates in others?; Risk perceptions and risk preferences are widely recognized by economists as the major factors influencing risky behavior. An understanding of how to use public policy to positively influence risky behavior requires understanding to what extent differences in risky behavior are attributable to differences in risk perceptions versus differences in risk preferences.; There are two major objectives for this research: Understanding risk preferences and understanding risk perceptions utilizing validated experimental protocols. We use a state-contingent framework that allows for more flexible preferences and control for risk perceptions. To isolate risk perceptions, we control for risk preferences and elicit risk perceptions under complete and incomplete information.; We find that the majority of subjects overestimate the probability of a low probability event, they are risk-averse with respect to payoffs of a high probability event, risk-neutral with respect to a low probability event and independently evaluate payoffs from different events. We find significant individual deviations from the conventional pattern that people overestimate low and underestimate high probabilities. Some people seem to consistently overestimate probabilities, while others seem to consistently underestimate probabilities. Furthermore, while risk preferences and perceptions are idiosyncratic, there are systematic trends related to gender, family financial background and individual attitudes towards one's own future income prospects. Another important result is that testing the experimental protocol and incorporating a measure of how well subjects understand it is crucial because otherwise results are biased. Conclusions drawn from these biased results are misleading. |
