Elicitation of Preferences under Ambiguity

This paper is about behaviour under ambiguity ‒ that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a ‘state of the world’ with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α­-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α­-MEU

An experimental test of a search model under ambiguity

The objective of this study is to design a laboratory experiment to explore the effect of ambiguity on a subject's search behavior in a finite-horizon sequential search model. In so doing, we employ a strategy to observe the potential trend of reservation points that is usually unobserved. We observe that subjects behaving consistently across treatments reduce their reservation points in the face of ambiguity over point distribution. Our result is consistent with the theoretical implication obtained by Nishimura and Ozaki (Journal of Economic Theory 2004

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, 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 particular parameterisations of the empirically relevant models of behaviour unde 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

Intuition and Reasoning in Choosing Ambiguous and Risky Lotteries

This paper focuses on information acquisition and individual decision making in ambiguous situations and presents a novel experimental design which may help to tackle open questions from a fresh perspective. Instead of giving subjects the choice between risky and ambiguous Ellsberg urns, we let them choose between a safe option and a risky lottery, whose risk is a priori unknown to subjects. By acquiring information about the probability distribution of the lottery's payoff s, subjects can reduce or even eliminate the ambiguity and turn the decision situation into one of risk. Under the assumption that an ambiguity averse subject should reduce ambiguity within a decision process we predicted that these subjects would request more information. Moreover, we investigate whether the relation between attitudes towards risk and ambiguity is linked to intuitive and deliberate thinking. Based on a detailed analysis of subjects' information acquisition and decision processes we do not find that those subjects showing ambiguity aversion in an urn experiment based on Halevy (2007) significantly reduce the ambiguity more than others. More intuitive subjects acquire less information and are more likely to avoid the risky lottery. Intuition seems to be negatively correlated with risk aversion, but not with ambiguity aversion. Moreover, we find a positive correlation between risk and ambiguity aversion.Die experimentelle Studie untersucht den Einfluss von Risiko- und Unsicherheitsaversion auf das individuelle Entscheidungsverhalten. Darüber hinaus wird der Einfluss von intuitivem Denken auf den Entscheidungsprozess betrachtet. Dabei stellt die Studie ein neues experimentelles Design vor, welches hilft, die offenen Fragen auf diesem Themengebiet aus einem neuen Blickwinkel zu betrachten. Anders als in der bestehenden Literatur ist der Grad an Unsicherheit in diesem Experiment endogen und kann durch die Probanden verringert werden. Entscheidungen zwischen einer sicheren Option und eingangs durch Unsicherheit charakterisierter Lotterien können somit durch Informationsgewinnung über die Wahrscheinlichkeitsstruktur der Lotterien zu Entscheidungssituationen unter Risiko verändert werden. Basierend auf detaillierten Analysen des Entscheidungsprozesses zeigen die Ergebnisse, dass Individuen mit höherem Grad an Unsicherheitsaversion, gemessen mit einem Testverfahren nach Halevy (2007), die Unsicherheit nicht signifikant mehr reduzieren als andere. Intuitiv denkende Individuen fragen weniger Informationen nach, vermeiden jedoch risikoreichere Lotterien. Die Studie findet eine positive Korrelation zwischen Intuition und Risikoaversion, aber keine zwischen Unsicherheitsaversion und Intuition. Darüber hinaus zeigen die Ergebnisse eine positive Korrelation zwischen Risiko- und Unsicherheitsaversion

A Revealed Reference Point for Prospect Theory

Without an instrument to identify the reference point, prospect theory includes a degree of freedom that makes the model difficult to falsify. To address this issue, we propose a foundation for prospect theory that advances existing approaches with three innovations. First, the reference point is not known a priori; if preferences are reference-dependent, the reference point is revealed from behavior. Second, the key preference axiom is formulated as a consistency property for attitudes towards probabilities; it entails both a revealed preference test for reference-dependence and a tool suitable for empirical measurement. Third, minimal assumptions are imposed for outcomes, thereby extending the model to general settings. By incorporating these three features we deliver general foundations for prospect theory that show how reference points can be identified and how the model can be falsified

Investment Choice with Polluted Capital.

This paper develops a two-sector overlapping generations model in which one sector produces an externality on the environmental quality and the other has no effect. We assume that environmental quality degradation results from production activity of one sector. Then, we characterize the dynamical system globally and establish sufficient conditions for the global uniqueness of a perfect-foresight equilibrium path in the case of a Cobb-Douglas production function and a CES utility function. We show that the existence and the stability of the steady stare depend on subtitution and income effect and on the degree of pollution.ENVIRONMENT ; CAPITAL ; ECONOMIC GROWTH

The values of relative risk aversion and prudence: a context-free interpretation

Abstract In this paper we apply to multiplicative lotteries the idea of preference for "harm disaggregation " that was used for additive lotteries in order to interpret the signs of successive derivatives of a utility function. In this way, we can explain in general terms why the values of the coefficients of relative risk aversion and relative prudence are usually compared respectively to 1 and 2. We also show how these values partition the sets of risk averse and/or prudent decision makers into two subgroups

Choix d'investissement dans un modele a generations imbriquees avec incertitude et pollution

En considerant que l'une des caracteristiques des problemes environnementaux est le niveau d'incertitude qui les accompagne, nous proposons d'etudier les effets de ces incertitudes sur les comportements de choix de portefeuille et d'epargne des agents. Nous montrons alors qu'a l'equilibre macro-economique, un accroissement de risque peut conduire a une diminution du stock de capital et favoriser les firmes a effet certain sur l'environnement.ENVIRONNEMENT ; RISQUE ; EPARGNE