Naïve, Resolute or Sophisticated? A Study of Dynamic Decision Making

Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do about their dynamic inconsistency. Economic theorists have identified three possible responses – to act naively (thus ignoring the dynamic inconsistency), to act resolutely (not letting their inconsistency affect their behaviour) or to act sophisticatedly (hence taking into account their inconsistency). We use data from a unique experiment (which observes both decisions and evaluations) in order to distinguish these three possibilities. We find that the majority of subjects are either naïve or resolute (with slightly more being naïve) but very few are sophisticated. These results have important implications for predicting the behaviour of people in dynamic situations.Dynamic decision making, naivety, sophistication, resoluteness, dynamic inconsistencies

The Explanatory and Predictive Power of Non Two-Stage-Probability Theories of Decision Making Under Ambiguity

Representing ambiguity in the laboratory using a Bingo Blower (which is transparent and not manipulable) and asking the subjects a series of allocation questions (which are more efficient than pairwise choice questions), we obtain data from which we can estimate by maximum likelihood methods (with explicit assumptions about the errors made by the subjects) a significant subset of the empirically relevant models of behaviour under ambiguity, and compare their relative explanatory and predictive abilities. Our results suggest that not all recent models of behaviour represent a major improvement in explanatory and predictive power, particularly the more theoretically sophisticated ones.Alpha Model, Ambiguity, Bingo Blower, Choquet Expected Utility, Contraction Model, Rank Dependent Expected Utility, Subjective Expected Utility,Vector Expected Utility.

Experimental Evidence on English Auctions: Oral Outcry vs. Clock

This paper tests experimentally, in a common value setting, the equivalence between the Japanese English auction (or clock auction) and an open outcry auction, where bidders are allowed to call their own bids. We find that (i) bidding behaviour is different in each type of auction, but also that (ii) this difference in bidding behaviour does not affect significantly the auction prices. This lends some support to the equivalence between these two types of auction. The winner's curse is present: overbidding led to higher than expected prices (under Nash bidding strategies) in both types of auction.English auctions, discrete bidding, winner's curse

The Explanatory and Predictive Power of Non Two-Stage-Probability Theories of Decision Making Under Ambiguity

Representing ambiguity in the laboratory using a Bingo Blower (which is transparent and not manipulable) and asking the subjects a series of allocation questions (which are more efcient than pairwise choice questions), we obtain data from which we can estimate by maximum likelihood methods (with explicit assumptions about the errors made by the subjects) a signicant subset of the empirically relevant models of behaviour under ambiguity, and compare their relative explanatory and predictive abilities. Our results suggest that not all recent models of behaviour represent a major improvement in explanatory and predictive power, particularly the more theoretically sophisticated ones.Alpha Model, Ambiguity, Bingo Blower, Choquet Expected Utility, Contraction Model, Rank Dependent Expected Utility, Subjec tive Expected Utility,Vector Expected Utility.

Assessing Multiple Prior Models of Behaviour under Ambiguity

The recent spate of theoretical models of behaviour under ambiguity can be partitioned into two sets: those involving multiple priors (in which the probabilities of the various events are not known but probabilities can be attached to the various possible values for the probabilities) and those not involving multiple priors. This paper concentrates on the first set and provides an experimental investigation into recently proposed theories. Using an appropriate experimental interface, in which the probabilities on the various possibilities are explicitly stated, we examine the fitted and predictive power of the various theories. We first estimate subject-by-subject, and then we estimateand predict using a mixture model over the contending theories. The individual estimates suggest that 25% of our 149 subjects have behaviour consistent with Expected Utility, 54% with the Smooth Model (of Klibanoff et al, 2005), 12% with Rank Dependent Expected Utility and 9% with the Alpha Model (of Ghirardato et al 2004); these figures are very close to the mixing proportions obtained from the mixture estimates. However, if we classify our subjects through the posterior probabilities (given all the evidence) of each of them being of the various types: using the estimates we get 38%, 19%, 28% and 16% (for EU, Smooth, Rank Dependent and Alpha); while using the predictions 36%, 19%, 33% and 11%. Interestingly the older models (EU and RD) seem to fare relatively better, suggesting that representing ambiguity through multiple priors is perceived by subjects as risk, rather than ambiguityAlpha Model, Ambiguity, Expected Utility, Mixture Models, Rank Dependent Expected Utility, Smooth Model.

Choquet OK?

There is a large theoretical literature in both economics and psychology on decision making under ambiguity (as distinct from risk) and many preference functionals proposed in this literature for describing behaviour in such contexts. However, the empirical literature is scarce and largely confined to testing between various proposed functionals. Using a new design, in which we create genuine ambiguity in the laboratory and can control the amount of ambiguity, we generate data which enables us to estimate several of the proposed preference functionals. In particular, we fit Subjective Expected Utility, Prospect Theory, Choquet Expected Utility, Maximin, Maximax, and Minimum Regret preference functionals, and examine how the fit changes when we vary the ambiguity. We find that the Choquet formulation performs best overall, though it is clear that different decision makers have different functionals. We also identify new decision rules which are not explicitly modelled in the literature.Ambiguity, Subjective Expected Utility, Prospect Theory, Choquet Expected Utility, Decision Making, Maximin, Maximax, Minimum Regret, Bingo Blower

Noise and Bias in Eliciting Preferences

In the context of eliciting preferences for decision making under risk, we ask the question: "which might be the 'best' method for eliciting such preferences?". It is well known that different methods differ in terms of the bias in the elicitation; it is rather less well-known that different methods differ in terms of their noisiness. The optimal trade-off depends upon the relative magnitutdes of these two effects. We examine four different elicitation mechanisms (pairwise choice, willingness-to-pay, willingness-to-accept, and certainty equivalents) and estimate both effect. Our results suggest that economists might be better advised to use what appears to be a relatively inefficient elicitation technique (i.e. pairwise choice) in order to avoid trhe bias in better-known and more widely-used techniques.Pairwise choice, willingness-to-pay, willingness-to-accept, errors, noise, biases

Do People Plan?

We report the results of an experimental investigation of a key axiom of economic theories of dynamic decision making – namely, that agents plan. Inferences from previous investigations have been confounded with issues concerning the preference functionals of the agents. Here, we present an innovative experimental design which is driven purely by dominance- if preferences satisfy dominance, we can infer whether subjects are planning or not. We implement three sets of experiments: the first two (the Individual Treatments) in which the same player takes decisions both in the present and the future; and the third (the Pairs Treatment) in which different players take decisions at different times. The two Individual treatments differed in that, in one, the subjects played sequentially, while, in the other, the subjects had to pre-commit to their future move. In all contexts, according to economic theory, the players in the present should anticipate the decision of the player in the future. We find that over half the participants in all three experimental treatments do not appear to be planning ahead; moreover, their ability to plan ahead does not improve with experience, except possibly when we force subjects to pre-commit to their future decision. These findings identify an important lacuna in economic theories, both for individual behaviour and for behaviour in games.

What Price Compromise? Testing a Possibly Surprising Implication of Nash Bargaining Theory

This paper identifies, and tests experimentally, a prediction of Nash Bargaining Theory that may appear counterintuitive. The context is a simple bargaining problem in which two players have to agree a choice from three alternatives. One alternative favours one player and a second favours the other. The third is an apparently reasonable compromise, but is in fact precluded as an agreed choice by the axioms of Nash Bargaining Theory. Experimental results show that agreement on this third alternative occurs rather often. So the axiomatic Nash theory is not well-supported by our evidence. Our subjects' behaviour could be interpreted as the paying of an irrationally (according to the Nash theory) high price in order to reach a compromise agreement.Experiments, Nash Bargaining Theory