Stochastic Expected Utility and Prospect Theory in a Horse Race: A Finite Mixture Approach

This study compares the performance of Prospect Theory versus Stochastic Expected Utility Theory at fitting data on decision making under risk. Both theories incorporate well-known deviations from Expected Utility Maximization such as the Allais paradox or the fourfold pattern of risk attitudes. Stochastic Expected Utility Theory parsimoniously extends the standard microeconomic model, whereas Prospect Theory, the benchmark for aggregate choice so far, is based on psychological findings. First, the two theories' fit to representative choice is assessed for two experimental data sets, one Swiss and one Chinese. In a second step, finite mixture regressions reveal a consistent mix of two different behavioral types suggesting that researchers may take individual heterogeneity into account in order to avoid aggregation bias.stochastic expected etility theory, prospect theory, finite mixture models

Happiness Functions with Preference Interdependence and Heterogeneity: The Case of Altruism within the Family

This study investigates the prevalence and extent of altruism by examining the relationship between parents' and their adult children's subjective well-being in a data set extracted from the German Socio-Economic Panel. In order to segregate the share of parents with altruistic preferences from those who are selfish, we estimate a finite mixture regression model. We control for various sources of potential bias by taking advantage of the data's panel structure. To validate our modeling approach we show that predicted altruists indeed make higher average transfer payments.altruism, subjective well-being, finite mixture regression models

Happiness functions with preference interdependence and heterogeneity: the case of altruism within the family

This study investigates the prevalence and extent of altruism by examining the relationship between parents' and their adult children's subjective well-being in a data set extracted from the German Socio-Economic Panel. To segregate the share of parents with altruistic preferences from those who are selfish, we estimate a finite mixture regression model. We control for various sources of potential bias by taking advantage of the data's panel structure. To validate our modeling approach, we show that predicted altruists indeed make higher average transfer payment

Happiness functions with preference interdependence and heterogeneity: The case of altruism within the family

This study investigates the prevalence and extent of altruism by examining the relationship between parents' and their adult children's subjective well-being in a data set extracted from the German Socio-Economic Panel. In order to segregate the share of parents with altruistic preferences from those who are selfish, we estimate a finite mixture regression model. We control for various sources of potential bias by taking advantage of the data's panel structure. To validate our modeling approach we show that predicted altruists indeed make higher average transfer payments

Risk and Rationality: Uncovering Heterogeneity in Probability Distortion

It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture regression model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two distinct types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from rational probability weighting consistent with prospect theory. 20% of the subjects weight probabilities linearly and behave essentially as expected value maximizers. Moreover, the individuals are assigned to one of these two groups with probabilities of close to one resulting in a low measure of entropy. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.individual risk taking behavior, latent heterogeneity, finite mixture regression models

Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size

How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory.Risk Aversion, Stake-Size Effect, Prospect Theory, Latent Heterogeneity

The Many Faces of Human Sociality: Uncovering the Distribution and Stability of Social Preferences

There is vast heterogeneity in the human willingness to weigh others’ interests in decision making. This heterogeneity raises the question how one can parsimoniously model and characterize heterogeneity across several dimensions of social preferences while still being able to predict behavior over time and across situations. We tackle this task with an experiment and a structural model of preferences that allows us to simultaneously estimate outcome-based and reciprocity-based social preferences. We find that non-selfish preferences are the rule rather than the exception. Neither at the level of the representative agent nor when we allow for several preference types do purely selfish types emerge. Instead, three qualitatively different other-regarding types emerge endogenously, i.e., without pre-specifying assumptions about the characteristics of types. When ahead, all three types value others’ payoffs significantly more than when behind. The first type, denoted strongly altruistic type, is characterized by a relatively large weight on others’ payoffs and moderate levels of reciprocity. The second type is, moderately altruistic and also puts positive weight on others’ payoff, yet at a considerable lower level, and displays no positive reciprocity while the third type is behindness averse, i.e., puts a large negative weight on others’ payoffs when behind and behaves selfishly otherwise. We also find that there is an unambiguous and temporally stable assignment of individuals to these types. Moreover, the three-type model substantially improves the predictions of individuals’ behavior across additional games while the information contained in subject-specific parameter estimates leads to no or only minor additional predictive power. This suggests that a parsimonious model with three types captures the bulk of the predictive power contained in the preference estimates

Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting

A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people's proneness to probability distortion

Spillovers of Prosocial Motivation: Evidence from an Intervention Study on Blood Donors

Spillovers of prosocial motivation are crucial for the formation of social capital. They facilitate interactions among individuals and create social multipliers that amplify the effects of policy interventions. We conducted a large-scale intervention study among dyads of blood donors to investigate whether social ties lead to motivational spillovers in the decision to donate. The intervention is a randomized phone call making donors aware of a current shortage of their blood type and serving us as an instrument for identifying motivational spillovers. About 40% of a donor's motivation spills over to the other donor, creating a significant social multiplier of 1.78