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Flexible Approximation of Subjective Expectations Using Probability Questions: An Application to the Investment Game

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Author Info

  • Bellemare, Charles

    ()
    (Université Laval)

  • Bissonnette, Luc

    ()
    (Tilburg University)

  • Kröger, Sabine

    ()
    (Université Laval)

Abstract

We use spline interpolation to approximate the subjective cumulative distribution function of an economic agent over the future realization of a continuous (possibly censored) random variable. The method proposed exploits information collected using a small number of probability questions on expectations and requires a weak prior knowledge of the shape of the underlying distribution. We find that eliciting 4 or 5 points on the cumulative distribution function of an agent is sufficient to accurately approximate a wide variety of underlying distributions. We show that estimated moments of general functions of the random variable can be computed analytically and/or using standard simulation techniques. We illustrate the usefulness of the method by estimating a simple model to asses the impact of expectations on investment decisions in a commonly used trust game.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3121.

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Length: 41 pages
Date of creation: Oct 2007
Date of revision:
Publication status: published as 2 separate articles in: Journal of Business and Economic Statistics, 2012 (Flexible Approximation of Subjective Expectations Using Probability Questions, doi:10.1198/jbes.2011.09053) and in Experimental Economics, 2010 (Bounding Preference Parameters under Different Assumptions about Beliefs: a Partial Identification Approach, doi:10.1007/s10683-010-9244-6)
Handle: RePEc:iza:izadps:dp3121

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Keywords: spline interpolation; approximation of subjective expectations; decision making under uncertainty;

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References

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Cited by:
  1. Charles Bellemare & Luc Bissonnette & Sabine Kröger, 2010. "Bounding preference parameters under different assumptions about beliefs: a partial identification approach," Experimental Economics, Springer, Springer, vol. 13(3), pages 334-345, September.

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