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The descriptive and predictive adequacy of theories of decision making under uncertainty/ambiguity

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  • John Hey

    ()

  • Gianna Lotito
  • Anna Maffioletti

Abstract

In this paper we examine the performance of theories of decision making under uncertainty/ambiguity from the perspective of their descriptive and predictive power, taking into account the relative parsimony of the various theories. To this end, we employ an innovative experimental design which enables us to reproduce ambiguity in the laboratory in a transparent and non-probabilistic way. We find that judging theories on the basis of their theoretical appeal, or on their ability to do well in testing contexts, is not the same as judging them on the basis of their explanatory and predictive power. We also find that the more elegant theoretical models do not perform as well as simple rules of thumb.

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File URL: http://hdl.handle.net/10.1007/s11166-010-9102-0
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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 41 (2010)
Issue (Month): 2 (October)
Pages: 81-111

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Handle: RePEc:kap:jrisku:v:41:y:2010:i:2:p:81-111

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Web page: http://www.springerlink.com/link.asp?id=100299

Related research

Keywords: Ambiguity; Bingo blower; Choquet expected utility; Decision field theory; Decision making; (Subjective) expected utility; (Gilboa and Schmeidler) MaxMin EU; (Gilboa and Schmeidler) MaxMax EU; (Ghirardato) alpha model; MaxMin; MaxMax; Minimum regret; Prospect theory; Uncertainty; D81; C91;

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  1. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
  2. Wilcox, Nathaniel T., 2011. "'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk," Journal of Econometrics, Elsevier, vol. 162(1), pages 89-104, May.
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  9. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  10. John Hey & Jinkwon Lee, 2005. "Do Subjects Separate (or Are They Sophisticated)?," Experimental Economics, Springer, vol. 8(3), pages 233-265, September.
  11. Uzi Segal, 1985. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," UCLA Economics Working Papers 362, UCLA Department of Economics.
  12. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  13. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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