Publications (26)29.56 Total impact
- [Show abstract] [Hide abstract] ABSTRACT: A growing body of literature studies the effects of aspiration levels on people’s choices. Researchers often assume an aspiration level at zero, which helps to explain several empirical phenomena. In two experiments, we test this assumption. Our experimental design exploits the discontinuity in the utility function at the aspiration level. The lotteries vary in complexity in terms of the number of outcomes and the use of round or non-round probabilities. We do not find support for an aspiration level at zero, neither for simple lotteries nor for complex lotteries. Overall, our aggregate results are consistent with prospect theory, but can also be explained by a population with heterogeneous aspiration levels instead of a homogeneous aspiration level at zero.
Dataset: Supplementary Material
- [Show abstract] [Hide abstract] ABSTRACT: This paper investigates whether individuals make similar decisions under risk when the outcomes are expressed in time versus monetary units. We address this issue in two studies measuring individual risk preferences and prospect theory parameters (i.e., utility curvature, probability weighting, and loss aversion) for both time and money. In the first (resp., second) study we consider relatively small (resp., large) time and monetary outcomes. We find that individuals hold similar risk preferences for time and money; we also find evidence that "time is money" with regard to the utility curvature for gains, loss aversion, and decision weighting. However, individuals have different valuations of losing time and money. The utility function for small losses of money is more concave and variable than the utility function for small losses of time (Study 1), but the utility function for large losses of time is more concave and variable than that for large losses of money (Study 2). We argue that these results reflect a difference in the perceived slack of the respective resource.
- [Show abstract] [Hide abstract] ABSTRACT: We present new evidence from the lab on the outcomes resulting from collective and individual decisions over time. We combined static and longitudinal methods to test four conditions on individual and collective time preferences: impatience, stationarity, age independence, and dynamic consistency. The collective decision process was designed to favor coordination through initial communication over voting intentions. Our main results are the following. First, individuals were impatient and deviated from consistent behavior. On the other hand, groups made patient and highly consistent decisions. Our voting mechanism helped the groups to converge and make stable and dynamically consistent decisions.
- [Show abstract] [Hide abstract] ABSTRACT: This is the final issue under this Editor-in-Chief, so this column is fittingly coauthored with the associate editors, whose terms also end with this issue, to emphasize their major role in the leadership of the journal. We first introduce incoming Editor-in-Chief Rakesh K. Sarin, briefly review this year's operations, and thank our editorial board and referees. Then we move on to this issue's five research articles. In our first article, Ralph L. Keeney presents Value-Focused Brainstorming. Next, Kenneth C. Lichtendahl Jr. and Samuel E. Bodily develop models for Multiplicative Utilities for Health and Consumption. Then, Luis V. Montiel and J. Eric Bickel present A Simulation-Based Approach to Decision Making with Partial Information. Our fourth article, by Kash Barker and Kaycee J. Wilson, is Decision Trees with Single and Multiple Interval-Valued Objectives. Our final article, by Anton Kühberger and Christian Wiener, is on Explaining Risk Attitude in Framing Tasks by Regulatory Focus: A Verbal Protocol Analysis and a Simulation Using Fuzzy Logic.
- [Show abstract] [Hide abstract] ABSTRACT: This paper focuses on decisions under ambiguity. Participants in a laboratory experiment made decisions in three different settings: (a) individually, (b) individually after discussing the decisions with others, and (c) in groups of three. We show that groups are more likely to make ambiguity-neutral decisions than individuals, and that individuals make more ambiguity-neutral decisions after discussing the decisions with others. This shift towards higher ambiguity neutrality in groups and after a group discussion is associated with a reduction in the rates of both ambiguity aversion and ambiguity seeking. We attribute the results to the effective and persuasive communication that takes place in groups.
- [Show abstract] [Hide abstract] ABSTRACT: Intertemporal decision making under risk involves two dimensions: time preferences and risk preferences. This paper focuses on the impact of time on risk preferences, independent of the intertemporal trade-off of outcomes, i.e., time preferences. It reports the results of an experimental study that examines how delayed resolution and payment of risky options influence individual choice. We used a simple experimental design based on the comparison of two-outcome monetary lotteries with the same delay. Raw data clearly reveal that subjects become more risk tolerant for delayed lotteries. Assuming a prospect theory-like model under risk, we analyze the impact of time on utility and decision weights, independent of time preferences. We show that the subjective treatment of outcomes (i.e., utility) is not significantly affected by time. In fact, the impact of time is completely absorbed by the probability weighting function. The effect of time on risk preferences was found to generate probabilistic optimism resulting in a higher risk tolerance for delayed lotteries. This paper was accepted by Teck Ho, decision analysis.
- [Show abstract] [Hide abstract] ABSTRACT: We model a dynamic purchase context in which a consumer is uncertain about the product's valuation. The consumer has two purchase opportunities for the product: forward purchase in period 1 or spot purchase in period 2. Two forms of regret are considered: buyer's regret over the money paid in excess of his valuation of the product when buying forward; and hesitater's regret for the lost opportunity of an increased surplus when not buying forward. We illustrate how regrets a ect the purchase decision: a consumer is more likely to buy forward when more averse to hesitater's regret but more likely to delay the decision when more averse to buyer's regret. We also consider alternative consumer types to characterize how regret a ects their spot purchase decisions as well as what triggers the regret. We show that type inconsistency (that is, a consumer's incorrect anticipation of his future type) induces an inferior period 1 purchase decision and thereby reduces the consumer's expected surplus.
- [Show abstract] [Hide abstract] ABSTRACT: This paper introduces a choice-based method that for the first time makes it possible to quantitatively measure regret theory, one of the most popular models of decision under uncertainty. Our measurement is parameter-free in the sense that it requires no assumptions about the shape of the functions reflecting utility and regret. The choice of stimuli was such that event-splitting effects could not confound our results. Our findings were largely consistent with the assumptions of regret theory although some deviations were observed. These deviations can be explained by psychological heuristics and referencedependence of preferences.
- [Show abstract] [Hide abstract] ABSTRACT: Support theory postulates that an individual’s probability judgment for a particular event depends on the description of that event. We analyze decisions based on such a premise and demonstrate the theory’s incompatibility with popular models of choice under uncertainty. In particular, we show how support theory’s subjective probabilities are at odds with multi-prior beliefs in addition to additive and nonadditive probabilities. We propose a behavioral relaxation of a well-known consistency argument—the book-making principle, in order to accommodate such description-dependent subjective probabilities. As a consequence, we provide a characterization of a set of decisions where the underlying probability judgments follow from support theory. This result offers a unique way for using description-dependent subjective probabilities as consistent inputs for decision analysis and can aid the design of elicitation procedures.
Article: Parametric Weighting Functions[Show abstract] [Hide abstract] ABSTRACT: This paper provides preference foundations for parametric weighting functions under rank-dependent utility. This is achieved by decomposing the independence axiom of expected utility into separate meaningful properties. These conditions allow us to characterize rank-dependent utility with power and exponential weighting functions. Moreover, by allowing probabilistic risk attitudes to vary within the probability interval, a preference foundation for rank-dependent utility with parametric inverse-S shaped weighting function is obtained.
- [Show abstract] [Hide abstract] ABSTRACT: Aspiration levels are a relevant aspect of decision making. We develop a model that includes the overall probabilities of success and failure relative to the aspiration level into an expected utility representation. This turns out to be equivalent to expected utility with a discontinuous utility function. We give a behavioral foundation to the proposed model and provide conditions to determine the relative weights of the overall probabilities of success and failure. An aspiration level reinforces loss aversion, can account for simultaneous risk-averse and risk-seeking behavior, and can explain choices violating the mean-variance approach. Copyright ©2008 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
- [Show abstract] [Hide abstract] ABSTRACT: Data on U.S. mergers and aquisitions from 1987 to 2006 indicate that firms with high market-to-book values (i.e., Tobin's Q) tend to merge with firms that have lower Q's, but that target Q's are on average higher than those of firms not involved in mergers at all. We capture this fact with a model in which the ratio of a bidder's Q to that of a prospective target has a non-monotone, inverted U-shaped effect on the probability of the two firms merging. Further, we find that the likelihood of a merger is positively and linearly related to the ratio of the growth potential of an acquirer and its prospective target. Using data from Compustat, a series of bootstrap logit regressions bear out these implications.
- [Show abstract] [Hide abstract] ABSTRACT: This paper extends de Finetti’s betting-odds method for assessing subjective beliefs to ambiguous events. Thus, a tractable manner for measuring decision weights under ambiguity is obtained. De Finetti’s method is so transparent that decision makers can evaluate the relevant tradeoffs in complex situations. The resulting data can easily be analyzed, using nonparametric techniques. Our extension is implemented in an experiment on predicting next-day’s performance of the Dow Jones and Nikkei stock indexes, where we test the existence and nature of rank dependence, finding usual patterns. We also find violations of rank dependence.
- [Show abstract] [Hide abstract] ABSTRACT: The book-making argument was introduced by de Finetti as a principle to prove the existence and uniqueness of subjective probabilities. It has subse-quently been accepted as a principle of rationality for decisions under uncer-tainty. This note shows that the book-making argument has relevant applica-tions to welfare: It gives a new foundation for utilitarianism that is alternative to Harsanyi's, it generalizes foundations based on the theorem of the alterna-tive, and it avoids arguments based on expected utility.
- [Show abstract] [Hide abstract] ABSTRACT: This paper introduces the rank-dependent quality-adjusted life-years (QALY) model, a new method to aggregate QALYs in economic evaluations of health care. The rank-dependent QALY model permits the formalization of influential concepts of equity in the allocation of health care, such as the fair innings approach, and it includes as special cases many of the social welfare functions that have been proposed in the literature. An important advantage of the rank-dependent QALY model is that it offers a straightforward procedure to estimate equity weights for QALYs. We characterize the rank-dependent QALY model and argue that its central condition has normative appeal.
Article: The Utility of Gambling Reconsidered[Show abstract] [Hide abstract] ABSTRACT: The utility of gambling, which entails an intrinsic utility or disutility of risk, has been alluded to in the economics literature for over a century. This paper demonstrates that any utility of gambling almost unavoidably implies a violation of fundamental rationality properties, such as transitivity or stochastic dominance, for static choices between gambles. This result may explain why the utility of gambling, a phenomenon so widely discussed, has never been formalized in the economics literature. The model of this paper accommodates well-known deviations from expected utility, such as the Allais paradox and the coexistence of gambling and insurance, while minimally deviating from expected utility.
- [Show abstract] [Hide abstract] ABSTRACT: Experimental studies show that aspiration levels are a relevant aspect of decision making. We develop a model that takes aspiration levels into account. We include in expected utility the overall probability of reaching at least the as- piration level, i.e., the probability of success. This leads to several predictions that …t empirical evidence. Most notably, aspiration levels lead to extreme loss aversion, can account for simultaneous risk-averse and risk-seeking behav- ior, and can explain choices violating the mean-variance approach. We give a behavioral foundation to the proposed model.
- [Show abstract] [Hide abstract] ABSTRACT: This paper extends de Finetti's betting-odds method for assessing subjective probabilities to ambiguous events, i.e. events for which beliefs of decision makers cannot be quantified through subjective probabilities. De Finetti's method is so transparent that decision makers can evaluate the relevant tradeoffs even in relatively complex situations, for prospects with three or more uncertain outcomes. The rank-dependent novelty of modern theories such as prospect theory and rank-dependent utility shows up only for such prospects, and several empirical properties of these theories of belief can be directly tested only there. The extension of de Finetti's method is implemented in an experiment on predicting next-day's performance of the Dow Jones and Nikkei indexes. Evidence is found for the rank dependence that underlies the aforementioned theories, for likelihood insensitivity ("inverse-S shape") as posited by prospect theory, and for pessimism as mostly assumed in economic studies. Part of the deviations from expected utility in the data are due to factors beyond any current decision model.
Article: Coherence without Additivity[Show abstract] [Hide abstract] ABSTRACT: The Dutch book argument is a coherence condition for the existence of subjective probabilities. This paper gives a general framework of analysis for this argument in a nonadditive probability setting. Particular cases are given by comonotonic and affinely related Dutch books that lead to Choquet expectations and Min expectations.
INSEADFontainebleau, Île-de-France, France
Tilburg, North Brabant, Netherlands
- CentER for Research in Economics and Business " CentER"