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Consistency, Heterogeneity, and Granularity of Individual Behavior under Uncertainty

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Author Info
Syngjoo Choi () (Department of Economics, University College London)
Raymond Fisman () (Graduate School of Business, Columbia University)
Douglas Gale () (Department of Economics, New York University)
Shachar Kariv () (Department of Economics, University of California, Berkeley)

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Abstract

By using graphical representations of budget sets over bundles of state-contingent commodities, we generate a very rich data set well-suited to studying behavior under uncertainty at the level of the individual subject. We test the data for consistency with the maximization hypothesis, and we estimate preferences using a two-parameter utility function based on Faruk Gul (1991). This specification provides a good interpretation to the data at the level of the individual subject and can account for the highly heterogeneous behaviors observed in the laboratory. The parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population.

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Publisher Info
Paper provided by Institute for Advanced Study, School of Social Science in its series Economics Working Papers with number 0076.

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Length: 31 pages
Date of creation: Jan 2007
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Handle: RePEc:ads:wpaper:0076

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Related research
Keywords: uncertainty; revealed preference; Expected Utility Theory; loss/disappointment aversion; experiment;

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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  1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July. [Downloadable!] (restricted)
  2. Syngjoo Choi & Raymond Fisman & Douglas M. Gale & Shachar Kariv, 2007. "Revealing Preferences Graphically: An Old Method Gets a New Tool Kit," American Economic Review, American Economic Association, vol. 97(2), pages 153-158, May. [Downloadable!]
  3. Varian, H.R., 1991. "Goodness of Fit for Revealed Preference Tests," Papers 13, Michigan - Center for Research on Economic & Social Theory.
    Other versions:
  4. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December. [Downloadable!]
  5. Dekel, Eddie, 1986. "An axiomatic characterization of preferences under uncertainty: Weakening the independence axiom," Journal of Economic Theory, Elsevier, vol. 40(2), pages 304-318, December. [Downloadable!] (restricted)
  6. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November. [Downloadable!] (restricted)
  7. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October. [Downloadable!] (restricted)
  8. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-92, July. [Downloadable!] (restricted)
  9. Loomes, Graham, 1991. " Evidence of a New Violation of the Independence Axiom," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 91-108, January.
  10. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October. [Downloadable!] (restricted)
  11. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May. [Downloadable!] (restricted)
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  12. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June. [Downloadable!] (restricted)
  13. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November. [Downloadable!] (restricted)
  14. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics. [Downloadable!]
  15. Ray Fisman & Shachar Kariv & Daniel Markovits, 2006. "Individual Preferences for Giving," Levine's Bibliography 666156000000000468, UCLA Department of Economics. [Downloadable!]
  16. Goeree, Jacob K. & Holt, Charles A., 2004. "A model of noisy introspection," Games and Economic Behavior, Elsevier, vol. 46(2), pages 365-382, February. [Downloadable!] (restricted)
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