Health benefits and uncertainty: an experimental analysis of the effects of risk presentation on auction bids for a healthful product

Experimental subjects receive a different presentation of a food product’s potential health risk reductions if eaten regularly. They are then asked to bid for the product. Results suggest that the bids vary across the groups that receive differing risk information. Contact author is Shaw ([email protected], 979-845-3555). Nayga and Shaw are professors and Silva is a PhD student. We thank Han Bleichrodt, Sean Fox, Britt Grosskopf, Jay Shogren, Steve Smith, Richard Woodward, and especially Laura Taylor and Christian Vossler for helpful suggestions on the experiments. Justin Baker, April Bond, Paan Jindapon, and Randy Sappington helped with the experiments or data. We also thank Mary Riddel, George Davis, William Neilson, Ximing Wu and Steven Yen for their comments. Citation: Shaw, W. Douglass, Rodolfo M. Nayga, Jr., and Andres Silva, (2006) "Health benefits and uncertainty: an experimental analysis of the effects of risk presentation on auction bids for a healthful product." Economics Bulletin, Vol. 4, No. 20 pp. 1-8 Submitted: May 30, 2006. Accepted: June 3, 2006. URL: http://economicsbulletin.vanderbilt.edu/2006/volume4/EB-06D80008A.pdf Introduction We examine what people might be willing to pay in an experimental auction for a cookie made with a healthful syrup, given various kinds of information conveying reduced risks of diabetes and colon cancer. These risks reductions may be difficult to quantify, may largely depend on individual characteristics and behavior, and are more difficult to communicate to people than other measures of risk (Kolata 2005). Such factors likely introduce uncertainty about the risks themselves, deemed “ambiguity” (Ellsberg 1961). Using four treatments in separate classroom experiments, we elicit subjects’ risk perceptions and auction bids for the cookie. We use a variety of approaches to discern each subject’s subjective probabilities, including a treatment involving a combination of life-duration tradeoffs and probability weighting functions (PWFs). PWFs, especially nonlinear ones, relax some of the traditional axioms of the conventional expected utility (EU) framework (see Tversky and Khaneman; Quiggin). PWFs for financial gambles have been examined before (see for example, Wakker and Deneffe), and in one study, mortality risks have been the sole focus (Bleichrodt and Pinto) but little effort has been made to tie ambiguous risks or PWFs to values for products with healthrelated benefits. This paper is a first step in this line of research. Many economists have acknowledged shortcomings of the EU framework, and several alternatives relax key restrictive assumptions that the EU framework imposes (see Starmer, 2000). Explanations of ambiguity include conflicting information (Fox and Tversky): if experts themselves are not clear about the risk magnitudes, then it is difficult 1 Eisenberger and Weber explore the relationship between ambiguity and values. Fox et al. (2002) also examines the affect of information on food choices and Kivi and Shogren (2005) look at ambiguity’s connection to food choice in a fashion similar to our 4 treatment.