The ratio bias phenomenon: fact or artifact?

in Theory and Decision (2011), 71(4), 615-641

The ratio bias—according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small ... [more ▼]

The ratio bias—according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small numbers—has recently gained momentum, with researchers especially in health economics emphasizing the policy importance of the phenomenon. Although the bias has been replicated several times, some doubts remain about its economic significance. Our two experiments show that the bias disappears once order effects are excluded, and once salient and dominant incentives are provided. This holds true for both choice and valuation tasks. Also, adding context to the decision problem does not alter this finding. No ratio bias could be found in between-subject tests either, which leads us to the conclusion that the policy relevance of the phenomenon is doubtful at best. [less ▲]

Risk Taking of Executives under Different Incentive Contracts: Experimental Evidence

E-print/Working paper (2011)

Classic financial agency theory recommends compensation through stock options rather than shares to induce risk neutrality in otherwise risk averse agents. In an experiment, we find that subjects acting ... [more ▼]

Classic financial agency theory recommends compensation through stock options rather than shares to induce risk neutrality in otherwise risk averse agents. In an experiment, we find that subjects acting as executives do also take risks that are excessive from the perspective of shareholders if compensated through options. Compensation through restricted company stock reduces the uptake of excessive risks. Even under stock-ownership, however, experimental executives continue to take excessive risks—a result that cannot be accounted for by classic incentive theory. We develop a basic model in which such risk-taking behavior is explained based on a richer array of risk attitudes derived from Prospect Theory. We use the model to derive hypotheses on what may be driving excessive risk taking in the experiment. Testing those hypotheses, we find that most of them are indeed borne out by the data. We thus conclude that a prospect-theory-based model is more apt at explaining risk attitudes under different compensation regimes than traditional principal-agent models grounded in expected utility theory. [less ▲]

Reining in Excessive Risk Taking by Executives: Experimental Evidence

Conference (2010, July)

On the Convergence of Social Protection Performance in the European Union

Scientific conference (2010, May)

Measurement and comparison of elderly welfare in the EU

Conference (2010, April)

Reining in Excessive Risk Taking by Executives: Experimental Evidence

Conference (2010)

Mesurer et comparer le bien-être des personnes âgées dans l’UE

in Revue Française d'Economie (2010), XXV(1), 213-227

Dans cet article, nous proposons une méthode de mesure multidimensionnelle du bien-être des personnes âgées dans l’UE au cours de la dernière décennie. Cette méthode agrège un certain nombre de facettes ... [more ▼]

Dans cet article, nous proposons une méthode de mesure multidimensionnelle du bien-être des personnes âgées dans l’UE au cours de la dernière décennie. Cette méthode agrège un certain nombre de facettes du bien-être, à savoir les niveaux moyen et relatif de revenus, les taux de pauvreté et d’inégalité, l’espérance de vie et la santé. Cette mesure synthétique permet de comparer les pays européens, d’étudier l’évolution et l’éventuelle convergence du niveau de bien-être des personnes âgées, qui connaissent des moments difficiles avec le vieillissement démographique et la crise financière de nombreux systèmes de retraite. [less ▲]

Unemployment and retirement in a model with age-specific heterogeneity

Conference (2009, December)

This paper presents a model where young and old workers compete for one type of jobs in the presence of retirement opportunity. Within this framework, we show that increased retirement opportunities (such ... [more ▼]

This paper presents a model where young and old workers compete for one type of jobs in the presence of retirement opportunity. Within this framework, we show that increased retirement opportunities (such as early retirement) has most of the time a depressing impact on the unemployment rate. Indeed the number of vacancies posted by fi rms is influenced by the probability that an old worker is going into retirement. We show that the degree to which younger workers are influenced by retirement of older workers depends on the relative productivity of young and older workers. It is only when older workers are much more productive than young workers that retirement may bene fit to unemployment. [less ▲]

La retraite anticipée des salariés en Belgique

in Revue Economique (2009)

Cet article propose une analyse de la cessation anticipée d’activité des salariés du secteur privé en Belgique. Contrairement aux études précédentes (Pestieau et Stijns [1999] et Dellis et al. [2004 ... [more ▼]

Cet article propose une analyse de la cessation anticipée d’activité des salariés du secteur privé en Belgique. Contrairement aux études précédentes (Pestieau et Stijns [1999] et Dellis et al. [2004]), notre étude se base sur un modèle structurel d’offre de travail. Ceci a l’avantage de pouvoir être utilisé afin de tester l’impact de réformes potentielles visant à augmenter l’activité des plus âgés. Nos résultats montrent qu’il y a une réelle préférence pour le loisir aux âges avancés mais que les incitants au départ anticipé contenus dans les systèmes de sécurité social jouent un rôle. En particulier, l’accès libre à différents régimes de revenus de remplacement à des âges relativement jeunes constitue un frein à la continuation de l’activité. [less ▲]

The Ratio Bias Phenomenon : Fact or Artifact ?

E-print/Working paper (2009)

The ratio bias – according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small ... [more ▼]

The ratio bias – according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small numbers – has recently gained momentum, with researchers especially in health economics emphasizing the policy importance of the phenomenon. Although the bias has been replicated several times, some doubts remain about its economic significance. Our two experiments show that the bias disappears once order effects are excluded, and once salient and dominant incentives are provided. This holds true for both choice and valuation tasks. Also, adding context to the decision problem does not change this outcome. No ratio bias could be found in between-subject tests either, which leads us to the conclusion that the policy relevance of the phenomenon is doubtful at best. [less ▲]