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Estimating Subjective Probabilities

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  • Andersen, Steffen

    ()
    (Department of Economics, Copenhagen Business School)

  • Fountain, John
  • Harrison, Glenn W.
  • Rutström, Elisabet E.

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 one can jointly estimate risk attitudes and subjective probabilities using structural maximum likelihood methods. 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.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7801
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Bibliographic Info

Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 05-2009.

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Length: 68 pages
Date of creation: 01 May 2009
Date of revision:
Handle: RePEc:hhs:cbsnow:2009_005

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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
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Web page: http://www.cbs.dk/departments/econ/
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Keywords: probability; beliefs; utility theory;

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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, Department of Economic Theory and Economic History of the University of Granada. 10/01, Department of Economic Theory and Economic History of the University of Granada..
  2. Glenn W. Harrison & Jimmy Martínez-Correa & J. Todd Swarthout & Eric R. Ulm, 2012. "Scoring Rules for Subjective Probability Distributions," Experimental Economics Center Working Paper Series, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University 2012-18, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  3. 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, European Association of Agricultural Economists 114313, European Association of Agricultural Economists.
  4. Rutström, E. Elisabet & Wilcox, Nathaniel T., 2009. "Stated beliefs versus inferred beliefs: A methodological inquiry and experimental test," Games and Economic Behavior, Elsevier, Elsevier, vol. 67(2), pages 616-632, November.
  5. Amine Ouazad & Lionel Page, 2012. "Students’ Perceptions of Teacher Biases: Experimental Economics in Schools," CEE Discussion Papers, Centre for the Economics of Education, LSE 0133, Centre for the Economics of Education, LSE.
  6. 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, Italian Association of Agricultural and Applied Economics (AIEAA) 124100, Italian Association of Agricultural and Applied Economics (AIEAA).
  7. Armantier, Olivier & Treich, Nicolas, 2010. "Eliciting Beliefs: Proper Scoring Rules, Incentives, Stakes and Hedging," TSE Working Papers, Toulouse School of Economics (TSE) 10-156, Toulouse School of Economics (TSE).
  8. Glenn W. Harrison & Jimmy Martínez-Correa & J. Todd Swarthout, 2012. "Eliciting Subjective Probabilities with Binary Lotteries," Experimental Economics Center Working Paper Series, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University 2012-16, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  9. Li Hao & Daniel Houser, 2011. "Honest Lies," Working Papers, George Mason University, Interdisciplinary Center for Economic Science 1021, George Mason University, Interdisciplinary Center for Economic Science.
  10. 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.
  11. Li Hao & Daniel Houser, 2012. "Belief elicitation in the presence of naïve respondents: An experimental study," Journal of Risk and Uncertainty, Springer, Springer, vol. 44(2), pages 161-180, April.
  12. Jaspersen, Johannes G., 2013. "An incentive compatible scoring rule for ordinal judgments of expected utility maximizers," Economics Letters, Elsevier, Elsevier, vol. 120(2), pages 245-248.
  13. Iñigo Iturbe-Ormaetxe Kortajarene & Giovanni Ponti & Josefa Tomás, 2013. "Myopic Loss Aversion under Ambiguity and Gender Effects," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2013-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  14. Amalia Di Girolamo & Glenn W. Harrison & Morten I. Lau & J. Todd Swarthout, 2013. "Characterizing Financial and Statistical Literacy," Experimental Economics Center Working Paper Series, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University 2013-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.

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