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Elicitation of preferences under ambiguity

Lookup NU author(s): Dr Xueqi Dong

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This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).


Abstract

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.


Publication metadata

Author(s): Carbone E, Dong X, Hey J

Publication type: Article

Journal: Journal of Risk and Uncertainty

Year: 2017

Volume: 54

Issue: 2

Pages: 87-102

Online publication date: 12/06/2017

Acceptance date: 02/04/2016

Print publication date: 01/04/2017

ISSN (print): 0895-5646

ISSN (electronic): 1573-0476

Publisher: Springer

URL: https://doi.org/10.1007/s11166-017-9256-0

DOI: 10.1007/s11166-017-9256-0


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