Today you will make choices about a series of gambles. Each gamble has the possibility of a negative outcome. In each gamble, you will be allowed to buy insurance against the negative outcome, although you are not required to buy the insurance.
Each gamble consists of drawing one ball from a basket. Each basket contains a different mixture of orange and white balls. If I draw a white ball, no loss occurs. If I draw an orange ball, this will result in a loss. Any loss you incur will be paid out of the money you earned by taking the Current Events Quiz, unless you choose to purchase insurance.
Here is how this will work: if you choose to purchase insurance, you will pay for this out of the money that you earned by taking the Current Events Quiz. If you do not purchase insurance and I draw a white ball, you will keep all of the money that you earned. If you do not purchase insurance and I draw an orange ball, you will lose some or all of the money that you earned by taking the Current Events Quiz. Each gamble will specify how much you may lose and how much the insurance will cost.
Each gamble that you face will be similar to the following (though the numbers used in the experiment will be different than this example): Open image in new window
If you faced the gamble in this example and you chose to purchase insurance you would pay me $1.20 from the money you earned by taking the Current Events Quiz. You would pay this $1.20 before I drew a ball from the basket, so you would pay it regardless of whether I drew a white ball or an orange ball. However, if you purchased this insurance and I drew an orange ball, you would not lose $12 in this example.
You will make decisions for 18 gambles during this part of the experiment. You should read the information provided to you in each one carefully: the number of orange and white balls, the loss you incur if an orange ball is drawn, and the insurance premium may change from one gamble to another.
Even though you will face 18 gambles in this experiment, only ONE of them will be used to determine your earnings. After you have made all 18 choices, we will put 18 numbered ping-pong balls into a cage. We will mix up these balls and then draw one ball from the cage. The number that appears on the ball that we draw will determine which choice will count.
For example, if we drew a ball with a 12 written on it, only your choice in Gamble 12 would count. None of your other choices would have any effect on your earnings. If you chose to purchase insurance in Gamble 12, you would pay the stated price of insurance in this decision. If you did not choose to purchase insurance in Gamble 12, the color of the ball drawn in this gamble would determine whether you lost any money in this experiment.
Even though only one of your 18 choices will count, you will not know in advance which gamble will be used to determine your earnings. Therefore, you should think about each of them carefully before submitting your choice.
Although each of you will make 18 choices, you may not face the same 18 gambles. Also, we have already shuffled your decision-sheets so each of you will receive your gambles in a different order. For example, one person may see Gamble 5 and then Gamble 3, while another person may see Gamble 7 first, and then Gamble 10. However, each of you will make decisions in 18 different gambles.
To summarize, this is what will happen during the rest of today’s experiment:
We will show you 18 gambles; in each you must choose whether or not you wish to purchase insurance at the stated price. We will show you these gambles one at a time. After everyone has made their first choice, we will show you a second gamble, and so on for all 18 gambles.
After everyone has made all 18 choices, we will draw a numbered ping-pong ball to determine which ONE of these gambles will count. We will not look at your choices for any other gamble when determining your earnings.
We will come to each of you and see if you chose to purchase insurance in this gamble. If you purchased insurance, we will collect the stated price of insurance from you.
We will place into this bucket the number of orange and white ping-pong balls specified in the gamble.
We will mix up these ping-pong balls and then draw ONE ball from the bucket.
If we draw a white ball, no one will incur a loss. If we draw an orange ball, you will lose the amount specified in this gamble, unless you chose to purchase insurance.
You will sign a receipt form and then may leave the experiment.
We ask that you not talk to one another during this experiment. If you have any questions at any time, please raise your hand and one of us will come to you to answer the question. Before we begin do you have any questions about these procedures or how your earnings will be determined?