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Non-Standard Risk Preferences: Measurement and Prediction

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Missouri
Hosted By: Economic Science Association
  • Chair: Charles Sprenger, University of California-San Diego

An Experimental Study of Incomplete Preferences, Endowment Effect, and Certainty Effect

Marina Agranov
,
California Institute of Technology
Pietro Ortoleva
,
Columbia University

Abstract

In this paper we explore the connection between incomplete preferences and two commonly observed behavioral phenomena such as endowment effect and common ratio effect. To measure incomplete preferences, we introduce a novel experimental method, which allows us to detect incomplete preferences at the individual level and to quantify the degree of incompleteness. Once we obtain an individual measure of incompleteness, we study if it is empirically related to the Endowment effect (both with lotteries and with mugs) and to the Certainty Effect.

Parametric Recoverability of Preferences

Yoram Halevy
,
University of British Columbia
Lanny Zrill
,
University of British Columbia

Abstract

Revealed preference theory is brought to bear on the problem of recovering approximate parametric preferences from consistent and inconsistent consumer choices. We propose measures of the incompatibility between the revealed preference ranking implied by choices and the ranking induced by the considered parametric preferences. These incompatibility measures are proven to characterize well-known inconsistency indices. We advocate a recovery approach that is based on such incompatibility measures, and demonstrate its applicability for misspecifcation measurement and model selection. Using an innovative experimental design we empirically substantiate that the proposed revealed-preference-based method predicts choices significantly better than a standard distance-based method

Preference Types and Welfare in Insurance Markets

Levon Barseghyan
,
Cornell University
Maura Coughlin
,
Cornell University
Francesca Molinari
,
Cornell University
Joshua C. Teitelbaum
,
Georgetown University

Abstract

This paper builds a procedure to partially identify and estimate the share of households that conform to various models of decision making under uncertainty – such as probability weighting, reference dependent loss aversion, and standard expected utility – and uses the estimated decision types and preferences to measure welfare implications of salient interventions in insurance markets. The procedure leverages advances in random set theory to overcome typical identification concerns that arise when households’ decisions are consistent with multiple types of rational behavior. It is computationally tractable and informative about both the underlying preference structure and the shares of various decision types.

A Stream of Prospects or a Prospect of Streams: On the Evaluation of Intertemporal Risks

James Andreoni
,
University of California-San Diego
Paul Feldman
,
University of California-San Diego
Charles Sprenger
,
University of California-San Diego

Abstract

Recent discussion about the relationship between risk preferences and time preferences has identified gaps in the understanding of the psychology of intertemporal risks. Critical to closing this gap is an understanding of which dimension of intertemporal risk — the risk or the time — is evaluated first. Though under discounted expected utility this ordering is of no consequence, under discounted non-expected utility the order of evaluation is critical. We provide experimental tests under which different orderings of evaluation generate substantially different behavior, and find compelling support for the notion that the risk dimension is evaluated first.
JEL Classifications
  • D1 - Household Behavior and Family Economics
  • D3 - Distribution