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Flexible Approximation of Subjective Expectations using Probability Questions -An Application to the Investment Game-

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Author Info
Charles Bellemare
Luc Bissonnette
Sabine Kroger

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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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Paper provided by CIRPEE in its series Cahiers de recherche with number 0734.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0734

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Related research
Keywords: Approximation of subjective expectations; spline interpolation; decision making under uncertainty;

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Find related papers by JEL classification:
Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General
D39 - Microeconomics - - Distribution - - - Other

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