Prudence with Respect to Ambiguity
In: The economic journal: the journal of the Royal Economic Society, Band 127, Heft 604, S. 1731-1755
ISSN: 1468-0297
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In: The economic journal: the journal of the Royal Economic Society, Band 127, Heft 604, S. 1731-1755
ISSN: 1468-0297
In: Decision analysis: a journal of the Institute for Operations Research and the Management Sciences, INFORMS, Band 5, Heft 2, S. 76-87
ISSN: 1545-8504
Two events are exchangeable for an agent when she is indifferent to permutations of their outcomes. Such events are thus revealed to be equally likely. If they are complementary, the subjective probability associated with each event should be 1/2 (assuming the additivity of the probability measure). This paper reports the results of an experiment that elicits probabilities through exchangeable events. The experiment shows that this method does not suffer from source dependence, i.e., the preference for betting on some events based on knowledge about the mechanism that generates them. However, it also highlights how additivity might be violated. This paper deduces the practical implications of these results.
In: American economic review, Band 101, Heft 4, S. 1547-1560
ISSN: 1944-7981
Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results. (JEL D81)
In: Journal of economic psychology, Band 53, S. 67-82
ISSN: 0167-4870
In: Journal of risk and uncertainty, Band 44, Heft 2, S. 115-147
ISSN: 1573-0476
In: Journal of risk and uncertainty, Band 64, Heft 1, S. 43-87
ISSN: 1573-0476
AbstractDespite widespread exposure to substantial medical expenditure risk in low-income populations, health insurance enrollment is typically low. This is puzzling from the perspective of expected utility theory. To help explain it, this paper introduces a decomposition of the stated willingness to pay (WTP) for insurance into its fair price and three behavioral deviations from that price due to risk perception and risk attitude consistent with prospect theory, plus a residual. To apply this approach, we elicit WTP, subjective distributions of medical expenditures and risk attitude (utility curvature and probability weighting) from Filipino households in a nationwide survey. We find that the mean stated WTP of the uninsured is less than both the actuarially fair price and the subsidized price at which public insurance is offered. This is not explained by downwardly biased beliefs: both the mean and the median subjective expectation are greater than the subsidized price. Convex utility in the domain of losses pushes mean WTP below the fair price and the subsidized price, and the transformation of probabilities into decision weights depresses the mean further, at least using one of two specific decompositions. WTP is reduced further by factors other than risk perception and attitude.
In: Journal of risk and uncertainty, Band 52, Heft 2, S. 99-116
ISSN: 1573-0476
In: American economic review, Band 101, Heft 2, S. 695-723
ISSN: 1944-7981
We often deal with uncertain events for which no probabilities are known. Several normative models have been proposed. Descriptive studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces the source method, a tractable method for quantitatively analyzing uncertainty empirically. The theoretical key is the distinction between different sources of uncertainty, within which subjective (choice-based) probabilities can still be defined. Source functions convert those subjective probabilities into willingness to bet. We apply our method in an experiment, where we do not commit to particular ambiguity attitudes but let the data speak. (JEL D81)
In: Journal of risk and uncertainty, Band 54, Heft 3, S. 269-281
ISSN: 1573-0476
In: Journal of risk and uncertainty, Band 62, Heft 1, S. 1-28
ISSN: 1573-0476
AbstractThis paper introduces the Prince incentive system for measuring preferences. Prince combines the tractability of direct matching, allowing for the precise and direct elicitation of indifference values, with the clarity and validity of choice lists. It makes incentive compatibility completely transparent to subjects, avoiding the opaqueness of the Becker-DeGroot-Marschak mechanism. It can be used for adaptive experiments while avoiding any possibility of strategic behavior by subjects. To illustrate Prince's wide applicability, we investigate preference reversals, the discrepancy between willingness to pay and willingness to accept, and the major components of decision making under uncertainty: utilities, subjective beliefs, and ambiguity attitudes. Prince allows for measuring utility under risk and ambiguity in a tractable and incentive-compatible manner even if expected utility is violated. Our empirical findings support modern behavioral views, e.g., confirming the endowment effect and showing that utility is closer to linear than classically thought. In a comparative study, Prince gives better results than a classical implementation of the random incentive system.