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Although risk aversion is a fundamental element in standard theories of lottery choice, asset valuation, contracts, and insurance (e.g., Daniel Bernoulli, 1738; John W. Pratt, 1964; Kenneth J. Arrow, 1965), experimental research has provided little guidance as to how risk aversion should be modeled. To date, there have been several approaches used to assess the importance and nature of risk aversion. Using lottery-- choice data from a field experiment, Hans P. Binswanger (1980) concluded that most farmers exhibit a significant amount of risk aversion that tends to increase as payoffs are increased. Alternatively, risk aversion can be inferred from bidding and pricing tasks. In auctions, overbidding relative to Nash predictions has been attributed to risk aversion by some and to noisy decision-making by others, since the payoff consequences of such overbidding tend to be small (Glenn W. Harrison, 1989). Vernon L. Smith and James M. Walker (1993) assess the effects of noise and decision cost by dramatically scaling up auction payoffs. They find little support for the noise hypothesis, reporting that there is an insignificant increase in overbidding in private-value auctions as payoffs are scaled up by factors of 5, 10, and 20. Another way to infer risk aversion is to elicit buying and/or selling prices for simple lotteries. Steven J. Kachelmeier and Mohamed Shehata (1992) report a significant increase in risk aversion (or, more precisely, a decrease in risk-seeking behavior) as the prize value is increased. However, they also obtain dramatically different results depending on whether the choice task involves buying or selling, since subjects tend to put a high selling price on something they 11 own" and a lower buying price on something they do not, which implies risk-seeking behavior in one case and risk aversion in the other.1 Independent of the method used to elicit a measure of risk aversion, there is widespread belief (with some theoretical support discussed below) that the degree of risk aversion needed to explain behavior in low-payoff settings would imply absurd levels of risk aversion in high-payoff settings. The upshot of this is that risk-aversion effects are controversial and often ignored in the analysis of laboratory data. This general approach has not caused much concern because most theorists are used to bypassing risk-aversion issues by assuming that...