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Dual Criteria Decisions

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Author Info

  • Andersen, Steffen

    ()
    (Department of Economics, Copenhagen Business School)

  • Harrison, Glenn W.

    (Department of Economics, College of Business Administration, University of Central Florida, USA)

  • Lau, Morten Igel

    (Department of Economics and Finance, Durham Business School, Durham University, UK)

  • Rutström, Elisabet

    (Department of Economics, College of Business Administration, University of Central Florida, USA)

Abstract

The most popular models of decision making use a single criteria to evaluate projects or lotteries. However, decision makers may actually consider multiple criteria when evaluating projects. We consider a dual criteria model from psychology. This model integrates the familiar tradeoffs between risk and utility that economists traditionally assume, allowance for rank-dependent decision weights, and consideration of income thresholds. We examine the issues involved in full maximum likelihood estimation of the model using observed choice data. We propose a general method for integrating the multiple criteria, using the logic of mixture models, which we believe is attractive from a decision-theoretic and statistical perspective. The model is applied to observed choices from a major natural experiment involving intrinsically dynamic choices over highly skewed outcomes. The evidence points to the clear role that income thresholds play in such decision making, but does not rule out a role for tradeoffs between risk and utility or probability weighting.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7798
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Bibliographic Info

Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 02-2009.

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Length: 33 pages
Date of creation: 02 Jan 2009
Date of revision:
Handle: RePEc:hhs:cbsnow:2009_002

Contact details of provider:
Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Phone: 38 15 25 75
Fax: 38 15 34 99
Email:
Web page: http://www.cbs.dk/departments/econ/
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Related research

Keywords: decison making; mulitple criteria; psychology;

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Cited by:
  1. Jungmin Lee & Cary Deck & Javier Reyes & Chris Rosen, 2008. "Measuring Risk Attitudes Controlling for Personality Traits," Working Papers 0801, Florida International University, Department of Economics.

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