This paper studies the effect of learning information on people’s attitudes toward ambiguity. We propose a method to separate ambiguity attitudes from subjective probabilities and to decompose ...ambiguity attitudes into two components. Under models like prospect theory that represent ambiguity through nonadditive decision weights, these components reflect pessimism and likelihood insensitivity. Under multiple priors models, they reflect ambiguity aversion and perceived ambiguity. We apply our method in an experiment where we elicit the ask prices of options with payoffs depending on the returns of initial public offerings (IPOs) on the New York Stock Exchange. IPOs are a natural context to study the effect of learning, as prior information about their returns is unavailable. Subjects perceived substantial ambiguity and they were insensitive to likelihood information. We observed only little pessimism and ambiguity aversion. Subjective probabilities were well calibrated and close to the true frequencies. Subjects’ behavior moved toward expected utility with more information, but substantial deviations remained even in the maximum information condition.
Data and the online appendix are available at
https://doi.org/10.1287/mnsc.2016.2700
This paper was accepted by Manel Baucells, decision analysis.
The nature of utility is controversial. Whereas decision theory commonly assumes that utility is context specific, applied and empirical decision analysis typically assumes one unifying concept of ...utility applicable to all decision problems. This controversy has hardly been addressed empirically because of the absence of methods to measure utility outside the context of risk. We introduce a method to measure utility over time and compare utility under risk and utility over time. We distinguish between gains and losses and also measure loss aversion. In two experiments we found that utility under risk and utility over time differed and were uncorrelated. Utility under risk was more curved than utility over time. Subjects were loss averse both for risk and for time, but loss aversion was more pronounced for risk. Loss aversion over risk and time were uncorrelated. This suggests that loss aversion, although important in both decision contexts, is volatile and subject to framing.
This paper was accepted by Rakesh Sarin, decision analysis.
Ambiguity preferences for health Attema, Arthur E.; Bleichrodt, Han; L'Haridon, Olivier
Health economics,
November 2018, Volume:
27, Issue:
11
Journal Article
Peer reviewed
Open access
In most medical decisions, probabilities are ambiguous and not objectively known. Empirical evidence suggests that people's preferences are affected by ambiguity. Health economic analyses generally ...ignore ambiguity preferences and assume that they are the same as preferences under risk. We show how health preferences can be measured under ambiguity, and we compare them with health preferences under risk. We assume a general ambiguity model that includes many of the ambiguity models that have been proposed in the literature. For health gains, ambiguity preferences and risk preferences were indeed the same. For health losses, they differed with subjects being more pessimistic in decision under ambiguity. Utility and loss aversion were the same for risk and ambiguity. Our results imply that reducing the clinical ambiguity of health losses has more impact than reducing the ambiguity of health gains, that utilities elicited with known probabilities may not carry over to an ambiguous setting, and that ambiguity aversion may impact value of information analyses if losses are involved. These findings are highly relevant for medical decision making, because most medical interventions involve losses.
The Covid‐19 pandemic has disrupted the habits of billions of people around the world. Lockdown at home is mandatory, forcing many families, each member with their own sleep–wake habits, to spend ...24 hr a day together, continuously. Sleep is crucial for maintaining immune systems and contributes deeply to physical and psychological health. To assess sleep problems and use of sleeping pills, we conducted a cross‐sectional study of a representative sample of the general population in France. The self‐reported sleep complaint items, which covered the previous 8 days, have been used in the 2017 French Health Barometer Survey, a cross‐sectional survey on various public health issues. After 2 weeks of confinement, 74% of the participants (1,005 subjects) reported trouble sleeping compared with a prevalence rate of 49% in the last general population survey. Women reported more sleeping problems than men, with greater frequency or severity: 31% vs. 16%. Unusually, young people (aged 18–34 years) reported sleep problems slightly more frequently than elderly people (79% vs. 72% among those aged 35 or older), with 60% of the younger group reporting that these problems increased with confinement (vs. 51% of their elders). Finally, 16% of participants reported they had taken sleeping pills during the last 12 months, and 41% of them reported using these drugs since the lockdown started. These results suggest that the COVID crisis is associated with severe sleep disorders among the French population, especially young people.
Abstract
Several papers have challenged the robustness of loss aversion, claiming that it is context-dependent and disappears for small stakes. These papers use a behavioral definition of loss ...aversion that may be confounded by diminishing sensitivity and probability/event weighting under the new version of prospect theory (PT). We perform a new theory-based test of loss aversion that controls for these confounds. We found significant loss aversion for both small stakes and high stakes. The overall loss aversion coefficient varied between 1.25 and 1.45, less than commonly observed. Loss aversion decreased slightly for small stakes, but the effect was small and usually insignificant. Overall, our results indicate that, under PT, loss aversion is robust to stake size.
We propose a simple, parameter-free method that, for the first time, makes it possible to completely observe Tversky and Kahneman's (1992) prospect theory. While methods exist to measure event ...weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby it can measure prospect theory's entire utility function. Consequently, we can properly identify properties of utility and perform new tests of prospect theory. We implemented our method in an experiment and obtained support for prospect theory. Utility was concave for gains and convex for losses and there was substantial loss aversion. Both utility and loss aversion were the same for risk and ambiguity, as assumed by prospect theory, and sign-comonotonic trade-off consistency, the central condition of prospect theory, held.
•Multivariate risk preferences are theoretically important to explain health-related behavior.•We measure higher order risk preferences for health and wealth by means of the risk apportionment ...technique.•We observe strong evidence for risk aversion and prudence for health and wealth in the gain domain, but more neutrality in the loss domain.•In the multivariate setting, we find correlation aversion and cross-prudence for gains, and correlation seeking for losses.•We conclude that there is clear evidence that multivariate risk preferences are sign-dependent.
We investigate univariate and multivariate risk preferences for health (longevity) and wealth. We measure attitudes toward correlation and attitudes toward higher order dependence structures such as cross-prudence and cross-temperance, making use of the risk apportionment technique proposed by Eeckhoudt et al. (2007). For multivariate gains, we find correlation aversion and cross-prudence in longevity and wealth. For losses, we observe correlation seeking and cross-imprudence. We do not find clear evidence for cross-temperance. Our results indicate that longevity and wealth are considered to be substitutes for gains, but not for losses. Second, univariate (higher order) risk preferences are comparable for longevity and wealth, although somewhat closer to linearity for wealth. Third, we find evidence that attitudes toward dependence structures in the health domain are sign-dependent.
Law and economic behaviour Bouchouicha, Ranoua; L’Haridon, Olivier; Vieider, Ferdinand M.
Journal of Comparative Economics,
03/2024, Volume:
52, Issue:
1
Journal Article
Peer reviewed
Open access
Preferences play a key role in economic models as drivers of behaviour. Recent contributions have started to model preferences as endogenously determined. This creates two fundamental issues for ...empirical research. The first concerns the determinants of preferences. The second concerns the effect of preferences on economic outcomes, which become difficult to quantify once preferences are endogenous. We explore the extent to which the prevalence of risk tolerance across countries is endogenously determined by the legal and institutional environment of a country, and whether this behavioural trait in turn contributes to shaping the aggregate entrepreneurship rate. To do so, we rely on structural equation modelling, where the direction of causality arises from the underlying model assumed to construct the equations. Data fit to the model serve to determine whether the underlying causal model presents a plausible representation of the empirical facts. We find that legal origins exert a strong effect on risk tolerance. We further document an indirect effect of legal origins on entrepreneurship rates passing through risk preferences. These findings illustrate the pervasiveness of the effect of legal origins on economic behaviour.
•Preferences are now widely considered endogenous, creating problems for causal identification.•Countries with English legal origins are more risk tolerant than those with French legal origins.•Risk tolerance as predicted by legal origins is correlated with entrepreneurship rates.•The effects we document can be interpreted as plausibly causal based on model assumptions.
The Arrow–Pratt index, a gold standard in studies of risk attitudes, is not directly observable from choice data. Existing methods to measure it rely on parametric assumptions. We introduce a ...discrete Arrow–Pratt index, and its relative counterpart, that can be directly obtained from choices. Our approach is general: it is (i) non-parametric, (ii) applicable to both risk and uncertainty, (iii) and robust to probability transformation, non-additive beliefs and multiple priors. Our index can also be used to characterize various decision models through various simple consistency requirements. We analyze its properties and demonstrate how it can be measured.
PDF
