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Estimating Subjective Probabilities

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  • Steffen Andersen
  • John Fountain
  • Glenn W. Harrison
  • E. Elisabet Rutström

Abstract

Subjective probabilities play a role in many economic decisions. There is a large theoretical literature on the elicitation of subjective probabilities, and an equally large empirical literature. However, there is a gulf between the two. The theoretical literature proposes a range of procedures that can be used to recover subjective probabilities, but stresses the need to make strong auxiliary assumptions or "calibrating adjustments" to elicited reports in order to recover the latent probability. With some notable exceptions, the empirical literature seems intent on either making those strong assumptions or ignoring the need for calibration. We illustrate how the joint estimation of risk attitudes and subjective probabilities using structural maximum likelihood methods can provide the calibration adjustments that theory calls for. This allows the observer to make inferences about the latent subjective probability, calibrating for virtually any well-specified model of choice under uncertainty. We demonstrate our procedures with experiments in which we elicit subjective probabilities. We calibrate the estimates of subjective beliefs assuming that choices are made consistently with expected utility theory or rank-dependent utility theory. Inferred subjective probabilities are significantly different when calibrated according to either theory, thus showing the importance of undertaking such exercises. Our findings also have implications for the interpretation of probabilities inferred from prediction markets.

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Bibliographic Info

Paper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2010-08.

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Length: 59
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:exc:wpaper:2010-08

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Cited by:
  1. Florian Artinger & Filippos Exadaktylos & Hannes Koppel & Lauri Sääksvuori, 2010. "Applying Quadratic Scoring Rule transparently in multiple choice settings: A note," ThE Papers 10/01, Department of Economic Theory and Economic History of the University of Granada..
  2. Armantier, Olivier & Treich, Nicolas, 2010. "Eliciting Beliefs: Proper Scoring Rules, Incentives, Stakes and Hedging," TSE Working Papers 10-156, Toulouse School of Economics (TSE).
  3. Amalia Di Girolamo & Glenn W. Harrison & Morten I. Lau & J. Todd Swarthout, 2013. "Characterizing Financial and Statistical Literacy," Experimental Economics Center Working Paper Series 2013-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  4. Glenn W. Harrison & Jimmy Martínez-Correa & J. Todd Swarthout & Eric R. Ulm, 2013. "Scoring Rules for Subjective Probability Distributions," Experimental Economics Center Working Paper Series 2013-05, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  5. Cerroni, Simone & Notaro, Sandra & Shaw, W. Douglass, 2011. "Real Monetary Incentives and Chained Questions: An Experimental Study Investigating the Validity of Risk Estimates Elicited via Exchangeability Method," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114313, European Association of Agricultural Economists.
  6. Jaspersen, Johannes G., 2013. "An incentive compatible scoring rule for ordinal judgments of expected utility maximizers," Economics Letters, Elsevier, vol. 120(2), pages 245-248.
  7. Ouazad, Amine & Page, Lionel, 2013. "Students' perceptions of teacher biases: Experimental economics in schools," Journal of Public Economics, Elsevier, vol. 105(C), pages 116-130.
  8. Li Hao & Daniel Houser, 2011. "Honest Lies," Working Papers 1021, George Mason University, Interdisciplinary Center for Economic Science.
  9. Iñigo Iturbe-Ormaetxe Kortajarene & Giovanni Ponti & Josefa Tomás, 2013. "Myopic Loss Aversion under Ambiguity and Gender Effects," Working Papers. Serie AD 2013-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  10. Rutström, E. Elisabet & Wilcox, Nathaniel T., 2009. "Stated beliefs versus inferred beliefs: A methodological inquiry and experimental test," Games and Economic Behavior, Elsevier, vol. 67(2), pages 616-632, November.
  11. Simone Cerroni & Sandra Notaro & W. Douglass Shaw, 2011. "Do Monetary Incentives and Chained Questions Affect the Validity of Risk Estimates Elicited via the Exchangeability Method? An Experimental Investigation," Department of Economics Working Papers 1110, Department of Economics, University of Trento, Italia.
  12. Cerroni, Simone & Notaro, Sandra & Shaw, W. Douglass, 2012. "The validity of risk estimates elicited via the Exchangeability Method: An experimental investigation of consumers’ perceived health risks," Congress Papers 124100, Italian Association of Agricultural and Applied Economics (AIEAA).
  13. Li Hao & Daniel Houser, 2012. "Belief elicitation in the presence of naïve respondents: An experimental study," Journal of Risk and Uncertainty, Springer, vol. 44(2), pages 161-180, April.
  14. Glenn W. Harrison & Jimmy Martínez-Correa & J. Todd Swarthout, 2012. "Eliciting Subjective Probabilities with Binary Lotteries," Experimental Economics Center Working Paper Series 2012-16, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.

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