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Inferring Beliefs as Subjectively Uncertain Probabilities

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

We propose a method for estimating subjective beliefs, viewed as a subjective probability distribution. The key insight is to characterize beliefs as a parameter to be estimated from observed choices in a well-defined experimental task, and to estimate that parameter as a random coefficient. The experimental task consists of a series of standard lottery choices in which the subject is assumed to use conventional risk attitudes to select one lottery or the other, and then a series of betting choices in which the subject is presented with a range of bookies offering odds on the outcome of some event that the subject has a belief over. Knowledge of the risk attitudes of subjects conditions the inferences about subjective beliefs. Maximum simulated likelihood methods are used to estimate a structural model in which subjects employ subjective beliefs to make bets. We present evidence that some subjective probabilities are indeed best characterized as probability distributions with non-zero variance.

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File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2010-14.pdf
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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 2010-14.

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Length: 32
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:exc:wpaper:2010-14
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