The lottery-panel task for bi-dimensional parameter-free elicitation of risk attitudes

We propose first, a simple task for the eliciting attitudes toward risky choice, the SGG lottery-panel task, which consists in a series of lotteries constructed to compensate riskier options with higher risk-return trade-offs. Using Principal Component Analysis technique, we show that the SGG lottery-panel task is capable of capturing two dimensions of individual risky decision making i.e. subjects’ average risk taking and their sensitivity towards variations in risk-return. From the results of a large experimental dataset, we confirm that the task systematically captures a number of regularities such as: A tendency to risk averse behavior (only around 10% of choices are compatible with risk neutrality); An attraction to certain payoffs compared to low risk lotteries, compatible with over-(under-) weighting of small (large) probabilities predicted in PT and; Gender differences, i.e. males being consistently less risk averse than females but both genders being similarly responsive to the increases in risk-premium. Another interesting result is that in hypothetical choices most individuals increase their risk taking responding to the increase in return to risk, as predicted by PT, while across panels with real rewards we see even more changes, but opposite to the expected pattern of riskier choices for higher risk-returns. Therefore, we conclude from our data that an “economic anomaly” emerges in the real reward choices opposite to the hypothetical choices. These findings are in line with Camerer's (1995) view that although in many domains, paid subjects probably do exert extra mental effort which improves their performance, choice over money gambles is not likely to be a domain in which effort will improve adherence to rational axioms (p. 635). Finally, we demonstrate that both dimensions of risk attitudes, average risk taking and sensitivity towards variations in the return to risk, are desirable not only to describe behavior under risk but also to explain behavior in other contexts, as illustrated by an example. In the second study, we propose three additional treatments intended to elicit risk attitudes under high stakes and mixed outcome (gains and losses) lotteries. Using a dataset obtained from a hypothetical implementation of the tasks we show that the new treatments are able to capture both dimensions of risk attitudes. This new dataset allows us to describe several regularities, both at the aggregate and within-subjects level. We find that in every treatment over 70% of choices show some degree of risk aversion and only between 0.6% and 15.3% of individuals are consistently risk neutral within the same treatment. We also confirm the existence of gender differences in the degree of risk taking, that is, in all treatments females prefer safer lotteries compared to males. Regarding our second dimension of risk attitudes we observe, in all treatments, an increase in risk taking in response to risk premium increases. Treatment comparisons reveal other regularities, such as a lower degree of risk taking in large stake treatments compared to low stake treatments and a lower degree of risk taking when losses are incorporated into the large stake lotteries. Results that are compatible with previous findings in the literature, for stake size effects (e.g., Binswanger, 1980; Antoni Bosch-Domènech & Silvestre, 1999; Hogarth & Einhorn, 1990; Holt & Laury, 2002; Kachelmeier & Shehata, 1992; Kühberger et al., 1999; B. J. Weber & Chapman, 2005; Wik et al., 2007) and domain effect (e.g., Brooks and Zank, 2005, Schoemaker, 1990, Wik et al., 2007). Whereas for small stake treatments, we find that the effect of incorporating losses into the outcomes is not so clear. At the aggregate level an increase in risk taking is observed, but also more dispersion in the choices, whilst at the within-subjects level the effect weakens. Finally, regarding responses to risk premium, we find that compared to only gains treatments sensitivity is lower in the mixed lotteries treatments (SL and LL). In general sensitivity to risk-return is more affected by the domain than the stake size. After having described the properties of risk attitudes as captured by the SGG risk elicitation task and its three new versions, it is important to recall that the danger of using unidimensional descriptions of risk attitudes goes beyond the incompatibility with modern economic theories like PT, CPT etc., all of which call for tests with multiple degrees of freedom. Being faithful to this recommendation, the contribution of this essay is an empirically and endogenously determined bi-dimensional specification of risk attitudes, useful to describe behavior under uncertainty and to explain behavior in other contexts. Hopefully, this will contribute to create large datasets containing a multidimensional description of individual risk attitudes, while at the same time allowing for a robust context, compatible with present and even future more complex descriptions of human attitudes towards risk.

Incentive effects on risk attitude in small probability prospects

We report between-subject results on the effect of monetary stakes on risk attitudes. While we find the typical risk seeking for small probabilities, risk seeking is reduced under high stakes. This suggests that utility is not consistently concave.

Epidemiological risk assessment using linked network and grid based modelling: Phytophthora ramorum and Phytophthora kernoviae in the UK

We developed a stochastic simulation model incorporating most processes likely to be important in the spread of Phytophthora ramorum and similar diseases across the British landscape (covering Rhododendron ponticum in woodland and nurseries, and Vaccinium myrtillus in heathland). The simulation allows for movements of diseased plants within a realistically modelled trade network and long-distance natural dispersal. A series of simulation experiments were run with the model, representing an experiment varying the epidemic pressure and linkage between natural vegetation and horticultural trade, with or without disease spread in commercial trade, and with or without inspections-with-eradication, to give a 2 x 2 x 2 x 2 factorial started at 10 arbitrary locations spread across England. Fifty replicate simulations were made at each set of parameter values. Individual epidemics varied dramatically in size due to stochastic effects throughout the model. Across a range of epidemic pressures, the size of the epidemic was 5-13 times larger when commercial movement of plants was included. A key unknown factor in the system is the area of susceptible habitat outside the nursery system. Inspections, with a probability of detection and efficiency of infected-plant removal of 80% and made at 90-day intervals, reduced the size of epidemics by about 60% across the three sectors with a density of 1% susceptible plants in broadleaf woodland and heathland. Reducing this density to 0.1% largely isolated the trade network, so that inspections reduced the final epidemic size by over 90%, and most epidemics ended without escape into nature. Even in this case, however, major wild epidemics developed in a few percent of cases. Provided the number of new introductions remains low, the current inspection policy will control most epidemics. However, as the rate of introduction increases, it can overwhelm any reasonable inspection regime, largely due to spread prior to detection. (C) 2009 Elsevier B.V. All rights reserved.

Gene flow, risk assessment and the environmental release of transgenic plants

The release of genetically modified plants is governed by regulations that aim to provide an assessment of potential impact on the environment. One of the most important components of this risk assessment is an evaluation of the probability of gene flow. In this review, we provide an overview of the current literature on gene flow from transgenic plants, providing a framework of issues for those considering the release of a transgenic plant into the environment. For some plants gene flow from transgenic crops is well documented, and this information is discussed in detail in this review. Mechanisms of gene flow vary from plant species to plant species and range from the possibility of asexual propagation, short- or long-distance pollen dispersal mediated by insects or wind and seed dispersal. Volunteer populations of transgenic plants may occur where seed is inadvertently spread during harvest or commercial distribution. If there are wild populations related to the transgenic crop then hybridization and eventually introgression in the wild may occur, as it has for herbicide resistant transgenic oilseed rape (Brassica napus). Tools to measure the amount of gene flow, experimental data measuring the distance of pollen dispersal, and experiments measuring hybridization and seed survivability are discussed in this review. The various methods that have been proposed to prevent gene flow from genetically modified plants are also described. The current "transgenic traits'! in the major crops confer resistance to herbicides and certain insects. Such traits could confer a selective advantage (an increase in fitness) in wild plant populations in some circumstances, were gene flow to occur. However, there is ample evidence that gene flow from crops to related wild species occurred before the development of transgenic crops and this should be taken into account in the risk assessment process.

Repeated challenge with prion disease: The risk of infection and impact on incubation period

Natural exposure to prion disease is likely to occur throughout successive challenges, yet most experiments focus on single large doses of infectious material. We analyze the results from an experiment in which rodents were exposed to multiple doses of feed contaminated with the scrapie agent. We formally define hypotheses for how the doses combine in terms of statistical models. The competing hypotheses are that only the total dose of infectivity is important (cumulative model), doses act independently, or a general alternative that interaction between successive doses occurs (to raise or lower the risk of infection). We provide sample size calculations to distinguish these hypotheses. In the experiment, a fixed total dose has a significantly reduced probability of causing infection if the material is presented as multiple challenges, and as the time between challenges lengthens. Incubation periods are shorter and less variable if all material is consumed on one occasion. We show that the probability of infection is inconsistent with the hypothesis that each dose acts as a cumulative or independent challenge. The incubation periods are inconsistent with the independence hypothesis. Thus, although a trend exists for the risk of infection with prion disease to increase with repeated doses, it does so to a lesser degree than is expected if challenges combine independently or in a cumulative manner.

Effects of active information processing on the understanding of risk information

Two experiments investigated effects of active processing of risk information on participants' understanding and judgments. It was hypothesized that more active processing would lead to better understanding and differences in affective judgments (e.g. increased satisfaction and reduced perceived risk to health). In both experiments participants were given a written scenario about their being prescribed a fictitious medication. This medication was said to cause side effects in 2% of people who took it. Before answering a series of written questions, participants in the active conditions of both experiments were asked to carry out a reflective task (portraying the size of risk on a bar chart in Experiment 1 and answering a reflective question in Experiment 2). The results showed that active participants rated the likelihood of experiencing possible side effects significantly lower than passive participants (Experiment 1), and that active participants were significantly more satisfied with the information and judged perceived risk to health from taking the medication significantly lower than passive participants (Experiment 2). In both experiments, active participants were significantly more correct in their probability and frequency estimates. The studies demonstrate that active processing of risk information leads to improved understanding of the information given. This has important implications for risk communication. In the context of health, better understanding should lead to improved decision-making and health outcomes. Copyright (C) 2004 John Wiley Sons, Ltd.

Training conditional and cumulative risk judgements: the role of frequencies, problem-structure and Einstellung

Two experiments implement and evaluate a training scheme for learning to apply frequency formats to probability judgements couched in terms of percentages. Results indicate that both conditional and cumulative probability judgements can be improved in this manner, however the scheme is insufficient to promote any deeper understanding of the problem structure. In both experiments, training on one problem type only (either conditional or cumulative risk judgements) resulted in an inappropriate transfer of a learned method at test. The obstacles facing a frequency-based training programme for teaching appropriate use of probability data are discussed. Copyright (c) 2006 John Wiley & Sons, Ltd.

Patients' understanding of risk associated with medication use: impact of European Commission guidelines and other risk scales

Patients want and need comprehensive and accurate information about their medicines so that they can participate in decisions about their healthcare: In particular, they require information about the likely risks and benefits that are associated with the different treatment options. However, to provide this information in a form that people can readily understand and use is a considerable challenge to healthcare professionals. One recent attempt to standardise the Language of risk has been to produce sets of verbal descriptors that correspond to specific probability ranges, such as those outlined in the European Commission (EC) Pharmaceutical Committee guidelines in 1998 for describing the incidence of adverse effects. This paper provides an overview of a number of studies involving members of the general public, patients, and hospital doctors, that evaluated the utility of the EC guideline descriptors (very common, common, uncommon, rare, very rare). In all studies it was found that people significantly over-estimated the likelihood of adverse effects occurring, given specific verbal descriptors. This in turn resulted in significantly higher ratings of their perceived risks to health and significantly lower ratings of their likelihood of taking the medicine. Such problems of interpretation are not restricted to the EC guideline descriptors. Similar levels of misinterpretation have also been demonstrated with two other recently advocated risk scales (Caiman's verbal descriptor scale and Barclay, Costigan and Davies' lottery scale). In conclusion, the challenge for risk communicators and for future research will be to produce a language of risk that is sufficiently flexible to take into account different perspectives, as well as changing circumstances and contexts of illness and its treatments. In the meantime, we urge the EC and other legislative bodies to stop recommending the use of specific verbal labels or phrases until there is a stronger evidence base to support their use.

Communicating risk of medication side effects: an empirical evaluation of EU recommended terminology

Two experiments compared people's interpretation of verbal and numerical descriptions of the risk of medication side effects occurring. The verbal descriptors were selected from those recommended for use by the European Union (very common, common, uncommon, rare, very rare). Both experiments used a controlled empirical methodology, in which nearly 500 members of the general population were presented with a fictitious (but realistic) scenario about visiting the doctor and being prescribed medication, together with information about the medicine's side effects and their probability of occurrence. Experiment 1 found that, in all three age groups tested (18 - 40, 41 - 60 and over 60), participants given a verbal descriptor (very common) estimated side effect risk to be considerably higher than those given a comparable numerical description. Furthermore, the differences in interpretation were reflected in their judgements of side effect severity, risk to health, and intention to comply. Experiment 2 confirmed these findings using two different verbal descriptors (common and rare) and in scenarios which described either relatively severe or relatively mild side effects. Strikingly, only 7 out of 180 participants in this study gave a probability estimate which fell within the EU assigned numerical range. Thus, large scale use of the descriptors could have serious negative consequences for individual and public health. We therefore recommend that the EU and National authorities suspend their recommendations regarding these descriptors until a more substantial evidence base is available to support their appropriate use.

Interpretation of recommended risk terms: differences between doctors and lay people

Objectives: To examine doctors' (Experiment 1) and doctors' and lay people's (Experiment 2) interpretations of two sets of recommended verbal labels for conveying information about side effects incidence rates. Method: Both studies used a controlled empirical methodology in which participants were presented with a hypothetical, but realistic, scenario involving a prescribed medication that was said to be associated with either mild or severe side effects. The probability of each side effect was described using one of the five descriptors advocated by the European Union (Experiment 1) or one of the six descriptors advocated in Calman's risk scale (Experiment 2), and study participants were required to estimate (numerically) the probability of each side effect occurring. Key findings: Experiment 1 showed that the doctors significantly overestimated the risk of side effects occurring when interpreting the five EU descriptors, compared with the assigned probability ranges. Experiment 2 showed that both groups significantly overestimated risk when given the six Calman descriptors, although the degree of overestimation was not as great for the doctors as for the lay people. Conclusion: On the basis of our findings, we argue that we are still a long way from achieving a standardised language of risk for use by both professionals and the general public, although there might be more potential for use of standardised terms among professionals. In the meantime, the EU and other regulatory bodies and health professionals should be very cautious about advocating the use of particular verbal labels for describing medication side effects.

Over the counter medicines and the need for immediate action: a further evaluation of European Commission recommended wordings for communicating risk

A study examined people's interpretation of European Commission (EC) recommended verbal descriptors for risk of medicine side effects, and actions to take if they do occur. Members of the general public were presented with a fictitious (but realistic) scenario about suffering from a stiff neck, visiting the local pharmacy and purchasing an over the counter (OTC) medicine (Ibruprofen). The medicine came with an information leaflet which included information about the medicine's side effects, their risk of occurrence, and recommended actions to take if adverse effects are experienced. Probability of occurrence was presented numerically (6%) or verbally, using the recommended EC descriptor (common). Results showed that, in line with findings of our earlier work with prescribed medicines, participants significantly overestimated side effect risk. Furthermore, the differences in interpretation were reflected in their judgements of satisfaction, side effect severity, risk to health, and intention to take the medicine. Finally, we observed no significant difference between people's interpretation of the recommended action descriptors ('immediately' and 'as soon as possible'). (C) 2003 Elsevier Science Ireland Ltd. All rights reserved.

Real estate portfolio size and risk reduction

The reduction of portfolio risk is important to all investors but is particularly important to real estate investors as most property portfolios are generally small. As a consequence, portfolios are vulnerable to a significant risk of under-performing the market, or a target rate of return and so investors may be exposing themselves to greater risk than necessary. Given the potentially higher risk of underperformance from owning only a few properties, we follow the approach of Vassal (2001) and examine the benefits of holding more properties in a real estate portfolio. Using Monte Carlo simulation and the returns from 1,728 properties in the IPD database, held over the 10-year period from 1995 to 2004, the results show that increases in portfolio size offers the possibility of a more stable and less volatile return pattern over time, i.e. down-side risk is diminished with increasing portfolio size. Nonetheless, increasing portfolio size has the disadvantage of restricting the probability of out-performing the benchmark index by a significant amount. In other words, although increasing portfolio size reduces the down-side risk in a portfolio, it also decreases its up-side potential. Be that as it may, the results provide further evidence that portfolios with large numbers of properties are always preferable to portfolios of a smaller size.

A value chain approach to animal diseases risk management: technical foundations and practical framework for field application

Classical risk assessment approaches for animal diseases are influenced by the probability of release, exposure and consequences of a hazard affecting a livestock population. Once a pathogen enters into domestic livestock, potential risks of exposure and infection both to animals and people extend through a chain of economic activities related to producing, buying and selling of animals and products. Therefore, in order to understand economic drivers of animal diseases in different ecosystems and to come up with effective and efficient measures to manage disease risks from a country or region, the entire value chain and related markets for animal and product needs to be analysed to come out with practical and cost effective risk management options agreed by actors and players on those value chains. Value chain analysis enriches disease risk assessment providing a framework for interdisciplinary collaboration, which seems to be in increasing demand for problems concerning infectious livestock diseases. The best way to achieve this is to ensure that veterinary epidemiologists and social scientists work together throughout the process at all levels.

Revenue-neutral tax policy under price uncertainty

The firm's response to revenue-neutral taxation is investigated under price uncertainty. Revenue-neutral policies adjust simultaneously the marginal tax rate and the level of exemptions while keeping expected tax receipts constant. Nonincreasing absolute risk aversion is sufficient to sign the firm's response: a reduction in the marginal rate causes the firm to contract output. Implications are established for the equilibrium level of treasury receipts.

Revenue-neutral tax policies under price uncertainty: reply

In their comment on my 1990 article, Yeh, Suwanakul, and Mai extend my analysis-which focused attention exclusively on firm output-to allow for simultaneous endogeneity of price, aggregate output, and numbers of firms. They show that, with downward- sloping demand, industry output adjusts positively to revenue-neutral changes in the marginal rate of taxation. This result is significant for two reasons. First, we are more often interested in predictions about aggregate phenomena than we are in predictions about individual firms. Indeed, firm-level predictions are frequently irrefutable since firm data are often unavailable. Second, the authors derive their result under a set of conditions that appear to be more general than those invoked in my 1990 article. In particular, they circumvent the need to invoke specific assumptions about the nature of firms' aversions toward risk. I consider this a useful extension and I appreciate the careful scrutiny of my paper.