Other Regarding Preferences: Outcomes, Intentions, or Interdependence

The Ultimatum Game seems to be the ideal experiment to test for the structure of preferences or the sequential rationality assumptions underlying subgame perfection. We study the theoretical implications of introducing the possibility of misconceptions - that actions may potentially affect continuation payoffs - and show that the set of Perfect Bayesian Nash Equilibria does not converge to the subgame perfect equilibrium when the possibility of misconception approaches zero. The perfect equilibria studied corresponds qualitatively to the experimental findings of offers made and unfair offers rejected.ulitmatum game, asymmetric information, interdependent preferences

- A BAYESIAN APPROACH TO UNCERTAINTY AVERSION

The Ellsberg paradox demonstrates that peoples belief over uncertainevents might not be representable by subjective probability. We relate this paradox to other commonly observed anomalies, suchas a rejection of the backward induction prediction in the one-shot Ultimatum Game. We argue that the pattern common to theseobservations is that the behavior is governed by rational rules. These rules have evolved and are optimal within the repeated andconcurrent environments that people usually encounter. When an individual relies on these rules to analyzeone-shot or single circumstances, paradoxes emerge. We show that when a risk averse individualhas a Bayesian prior and uses a rule which is optimal for simultaneous and positively correlatedambiguous risks to evaluate a single vague circumstance, his behavior will exhibit uncertaintyaversion. Thus, the behavior predicted by Ellsberg may be explained within the Bayesian expectedutility paradigm.Ellsberg paradox, rule rationality, ambiguity aversion, risk aversion,

Ambiguous correlation

Many decisions are made in environments where outcomes are determined by the realization of multiple random events. A decision maker may be uncertain how these events are related. We identify and experimentally substantiate behavior that intuitively reflects a lack of confidence in their joint distribution. Our findings suggest a dimension of ambiguity which is different from that in the classical distinction between risk and "Knightian uncertainty"

Uncertainty and Compound Lotteries: Calibration

The Ellsberg experiments provide an intuitive illustration that the Savage approach, which reduces subjective uncertainty to risk, is not rich enough to capture many decision makers' preferences. Recent experimental evidence suggests that decision makers reduce uncertainty to compound risk. This work presents a theoretical model of decision making in which preferences are defined on both Savage subjective acts and compound objective lotteries. Preferences are two-stage probabilistically sophisticated when the ranking of acts corresponds to a ranking of the respective compound lotteries induced by the acts through the decision maker's subjective belief. This family of preferences includes various theoretical models that have been proposed in the literature to accommodate non-neutral attitude towards ambiguity. The principle of calibration, which was used by Ramsey and de Finetti, allows an outside observer to relate preferences over acts and compound objective lotteries. If preferences abide by the calibration axioms, the evaluation of the compound lottery induced by an act through the subjective belief coincides with the evaluation of the corresponding compound objective lottery. Calibration provides the foundation that allows one to formalize and understand the tight empirical association between probabilistic sophistication and reduction of compound lotteries, for all two-stage probabilistically sophisticated preferences.

Ambiguous Correlation

Abstract Many decisions are made in environments where outcomes are determined by the realization of multiple random events. A decision maker may be uncertain how these events are related. We identify and experimentally substantiate behavior that intuitively re ‡ects a lack of con…dence in their joint distribution. Our …ndings suggest a dimension of ambiguity which is di¤erent from that in the classical distinction between risk and "Knightian uncertainty." Boston University, [email protected] and University of Toronto, [email protected]. We are grateful for discussions with Kyoungwon Seo and Chew Soo Hong, for detailed comments from Aurelien Baillon and especially Peter Wakker, for insightful and thoughtful suggestions by two referees and the editor -Dimitri Vayanos, and for comments from audiences in several conferences and workshops

Credit Constraints and the Measurement of Time Preferences

Incentivized experiments are commonly used to estimate marginal rates of intertemporal substitution (MRS) in the lab and in the field in order to make inferences about individual time preferences. This paper considers an integrated model of behavior in which individuals are subject to financial shocks and credit constraints, and take those into account when making experimental choices. The model shows that measured MRS depends on the individual’s effective interest rate which is equal to the relative marginal utility of current and future consumption. Experimental responses should therefore be correlated with other variables that describe the subject’s financial situation, like savings and shocks to income and consumption. We test the model using a new a panel data set from Mali and find evidence for such effects. Our results imply that the relationship between experimentally elicited MRS and time preferences is not straightforward. However, measured MRS can be useful in determining the importance of different types of financial shocks to the household

El Mustang, February 13, 1948

Student newspaper of California Polytechnic State University, San Luis Obispo, CA.https://digitalcommons.calpoly.edu/studentnewspaper/1533/thumbnail.jp