Abstract
This chapter examines Chinese students’ risk attitudes using selling and buying experiments with lotteries. We found that subjects were more risk averse during the buying experiment than during the selling experiment, suggesting an endowment effect. In the selling experiment, subjects were risk loving when there was a low win probability and risk averse with a high win probability, whereas they were risk averse in the buying experiment. Using the prize money won during the experiment as a measure of wealth, we found decreasing absolute risk aversion. Subjects’ risk attitudes as revealed in the experiments explain their risky asset holding behavior.
The original article first appeared in China Economic Review 19:245–259, 2008. A newly written addendum has been added to this book chapter.
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Notes
- 1.
- 2.
This figure is based on responses to our questionnaire from subjects of the experiment done in Shanghai and Tokyo. We asked about the cost of living per month.
- 3.
Kachelmeier and Shehata (1992) is a notable exception. They paid Chinese students monetary rewards three times their monthly revenue.
- 4.
Knetsch and Sinden (1984) is a notable exception. Their TEST3 consisted of selling and buying experiments which ask similar questions to ours. However, they are different from ours, in that different subjects are used for the selling and buying experiments.
- 5.
One subject felt unwell and left after the selling experiment was completed, so the number of the subjects for the buying experiment was 29.
- 6.
According to teachers and students at Fudan University, the students there study until around 10Â pm every day, so the evening experiment was not a burden to them. We conducted the experiment in the evening, because it was difficult to recruit students during the daytime, as they were expected to attend classes.
- 7.
This is necessary because in the selling experiment, subjects were given 20 lottery tickets with the expected payoff of 10,000 points. Furthermore, subjects would have been too embarrassed to buy a lottery ticket if they had no points at the outset.
- 8.
In addition to payoffs, subjects received a 120 yuan (US$14) participation fee.
- 9.
Note that Kachelmeier and Shehata (1992) show the certainty-equivalent ratio, which is equivalent to 1-TP.
- 10.
They do not show the confidence interval, so we cannot evaluate the significance of their results.
- 11.
According to a teacher at Fudan University, most Chinese students’ living expenses per month should be under or around 1,000 yuan (US$120). If this is true, our prize is tantamount to more than half their monthly living expenses.
- 12.
These results are the same as those from Japanese experiments. See Tsutsui et al. (2005).
- 13.
In the calculation of ARA data, we excluded one sample because the subject assigned 999 points to a lottery with a win probability of 100Â %, leading to an extreme value of 2.
- 14.
We would appreciate a comment by a referee on this point.
- 15.
We do not use POINTS as the wealth variable here because risky asset holding has nothing to do with the change in wealth during the experiments.
- 16.
The results by OLS are almost the same as those in Table 6.5.
- 17.
The sample size was 260, so the correlation coefficients were significant (5Â % critical value is 0.12). Hirata et al. (2006) report that the correlation coefficient between time discount rates of parents and their children is around 0.2, while the correlation coefficient between random pairs who have no relationship is zero.
- 18.
It cannot be denied that the questions on the subjects’ parents, RISK, ASSETS, and FINASSETS may not be answered correctly, so they may suffer from a measurement error. Nonetheless, the coefficient of AVARA is immune from such a measurement error, so its coefficient is not biased. As for the coefficients of ASSETS and FINASSETS, they may be biased if the measurement errors of RISK and ASSETS (FINASSETS) are correlated. However, because RISK is defined as the ratio of risky asset to FINASSETS, and because measurement errors of risky asset and FINASSETS are thought to be correlated, the measurement error of RISK is probably independent of that of FINASSETS. In addition, if we look at correlations between subjects’ own wealth (income, food consumption, expenditure per month, etc.) and their households’ wealth (annual income, real estate, financial assets, etc.) in the responses to some questions of the questionnaire, nine correlations out of 21 are significantly positive. This fact suggests that subjects may have adequate information about their parents’ wealth and those variables are somewhat reliable.
- 19.
Friend and Blume (1975) themselves reported that risky asset share positively correlates to financial assets. However, when wealth is defined as the total of financial and real assets, they found a negative correlation.
- 20.
Therefore, the low correlation mentioned below is not due to the difference in methods (experiment and questionnaire).
- 21.
Only one case is significantly positive out of 21 cases between items in the questionnaire, which is the correlation between the most similar questions (Q13 and Q15).
- 22.
Whether the prizes would be really paid or not for each round was written in the instruction and was announced carefully. The prizes were announced to pay for eight out of 12 rounds.
- 23.
For the details of the experimental results, see Ohtake and Tsutsui (2012).
- 24.
The similar experiments conducted in Waseda University are reported in Hiruma and Tsutsui (2005).
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Acknowledgments
This research was supported by the 21st Century COE (Center of Excellence) Program at Osaka University and Grant-in-Aid for Scientific Research 17203025 of the Ministry of Education, Culture, Sports, Science and Technology in Japan.
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Addendum: Comparison of Risk Attitudes Between Chinese and Japanese, and Between Students and Non-students
This addendum has been newly written for this book chapter.
Addendum: Comparison of Risk Attitudes Between Chinese and Japanese, and Between Students and Non-students
Similar selling and buying experiments reported in the text had been conducted by some of the same authors at Osaka University and Waseda University in Japan. In this addendum, we compare subjects’ risk attitudes in those experiments with the experimental result described in the text.
The experiments at Osaka University were conducted on March 2004 with 63 subjects (32 working people and 31 elderly retirees).Footnote 23 The experiments at Waseda University were conducted on March 2005 using 32 subjects (all undergraduate students)Footnote 24. Table 6.7 summarizes the subjects’ characteristics (gender and age) and the monetary payoffs obtained in each experiment.
Subjects in each experiment played the selling experiment for 20 rounds and the buying experiment for 20 rounds, with exactly the same procedure as described in the text. Using selling and buying prices that each subject assigned to a lottery ticket, ARA and TP were estimated for each subject.
Table 6.8 shows the overall mean ARA and TP in each experiment. For the comparison of the overall mean ARA and TP in the buying and selling experiment, we confirm that the overall mean ARA and TP in the buying experiment are larger than those in the selling experiment for all experiments, except for the overall mean TP of Osaka University. The fact that subjects are more risk averse in the selling experiment than in the buying experiment is consistent with the conclusion in the text, implying that the endowment effect for the lottery ticket is robustly observed.
Comparison of the overall mean ARA and TP between the three experiments reveals that the overall mean ARA and TP in the Osaka University experiment are always smaller than those in the Fudan University and Waseda University experiments. The result that subjects in the Osaka University experiment are more risk loving than subjects in the other two experiments might be attributed to their different backgrounds: subjects in the Osaka University experiment are working/elderly people, while subjects in Fudan University and Waseda University experiments are students. However, more investigation is called for in order to verify that non-students are generally more risk loving than students.
Figures 6.5 and 6.6 show the mean ARA and TP for each win probability in the selling experiment. From these figures, we can see that subjects tend to be risk loving or risk neutral for low win probabilities and risk neutral or risk averse for high win probabilities.
Mean ARA for each win probability: sell experiment
Mean TP for each win probability: sell experiment
Figures 6.7 and 6.8 show the mean ARA and TP for each win probability in the buying experiment. From these figures, we confirm that the mean ARA and TP in the buying experiment are greater than those in the selling experiment, except for the TP in the Osaka University experiment. This result probably reflects the endowment effect of the lottery ticket as discussed above.
Mean ARA for each win probability: buy experiment
Mean TP for each win probability: buy experiment
From these figures, we can see that the mean ARA and TP for the smallest win probability (less than 10Â %) in the Osaka University experiment are much smaller than those in the Fudan University and the Waseda University experiment in both the selling and the buying experiments. On the other hand, looking at the highest win probability, Osaka University shows an extremely high value compared with the other two universities. Basically the shapes of the graphs in these four figures are relatively similar between Fudan and Waseda Universities, whereas that of Osaka University is quite different. This suggests that risk attitude is not different between China and Japan, but is different between students and non-students. Of course, more research should be done to confirm this conjecture.
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Sasaki, S., Xie, S., Ohtake, F., Qin, J., Tsutsui, Y. (2016). Experiments on Risk Attitude: The Case of Chinese Students. In: Ikeda, S., Kato, H., Ohtake, F., Tsutsui, Y. (eds) Behavioral Economics of Preferences, Choices, and Happiness. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55402-8_6
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