Abstract: Higher order risk preferences are important determinants of economic behaviour. We apply insights from behavioural economics: we measure higher order risk preferences for pure gains and losses. We find a reflection effect not only for second order risk preferences, like Kahneman and Tversky (1979), but also for higher order risk preferences: we find risk aversion, prudence and intemperance for gains, and much more risk loving preferences, imprudence and temperance for losses. These findings are at odds with a universal preference for combining good with bad or good with good, which previous results suggest may underlie higher order risk preferences.

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Abstract: An important societal problem is that people underinsure against risks that are unlikely or occur in the far future, such as natural disasters and long-term care needs. One explanation is that uncertainty about the risk of non-reimbursement induces ambiguity averse and risk prudent decision makers to take out less insurance. We set up an insurance experiment to test this explanation. Consistent with the theoretical predictions, we find that the demand for insurance is lower when the nonperformance risk is ambiguous than when it is known and  when  decision  makers  are  risk  prudent.  We  cannot  attribute  the  lower  take-up  of insurance to our measure of ambiguity aversion, probably because ambiguity attitudes are richer than aversion alone.

Abstract: Varian (1988) showed that the utility maximization hypothesis cannot be falsified when only a subset of goods is observed. We show that this result does not hold under the assumptions that unobserved prices and expenditures remain constant. These assumptions are naturally satisfied in laboratory settings where the world outside the lab remains unchanged during the experiment. Hence for so-called induced budget experiments the Generalized Axiom of Revealed Preference is a necessary and sufficient condition for utility maximization in general, not just over lab goods. Lab experiments are therefore a valid tool to put the utility maximization hypothesis to the test.

Working papers

Abstract:  We propose an axiom that we call Agreement to deal with changing preferences and derive its empirical implications. The resulting revealed preference condition generalises GARP when preferences are different but preferences in one context are informative about preferences in another context. We apply this idea to a social choice experiment, where a player can respond to another player being kind or relatively unkind. We find that people have consistent preferences for each case, but that preferences depend on the kindness of the other player, and that subjects act in line with Agreement. We thus provide support for modelling and interpreting responses to the intentions of other players as a preference for reciprocity.

Abstract: Varian [Journal of Economic Theory, 46, 179:185 (1988)] introduced a fundamental theorem about testing the utility maximisation hypothesis if observations of the quantities of at least one good are missing. In this paper, a simple counterexample is presented against the original proof, and a new proof is provided. In addition, it is shown when satisfying GARP for a subset of goods is sufficient for satisfying GARP for all goods. The importance of these results is demonstrated in an empirical application.

Work in progress