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Dual Criteria Decisions

Author

Listed:
  • 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.

Suggested Citation

  • Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, Elisabet, 2009. "Dual Criteria Decisions," Working Papers 02-2009, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:2009_002
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    Cited by:

    1. Cary Deck & Jungmin Lee & Javier Reyes, 2008. "Risk attitudes in large stake gambles: evidence from a game show," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 41-52.
    2. Hensher, David A., 2010. "Hypothetical bias, choice experiments and willingness to pay," Transportation Research Part B: Methodological, Elsevier, vol. 44(6), pages 735-752, July.
    3. Hensher, David A. & Balbontin, Camila & Collins, Andrew T., 2018. "Heterogeneity in decision processes: Embedding extremeness aversion, risk attitude and perceptual conditioning in multiple process rules choice making," Transportation Research Part A: Policy and Practice, Elsevier, vol. 111(C), pages 316-325.
    4. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, Elisabet E., 2010. "Behavioral econometrics for psychologists," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 553-576, August.
    5. Ferro, Giuseppe M. & Kovalenko, Tatyana & Sornette, Didier, 2021. "Quantum decision theory augments rank-dependent expected utility and Cumulative Prospect Theory," Journal of Economic Psychology, Elsevier, vol. 86(C).
    6. Nerhagen, Lena & Pyddoke , Roger & Jussila Hammes, Johanna, 2014. "Response to a social dilemma : an analysis of the choice between an economic and an environmental optimum in a policy making context," Working papers in Transport Economics 2014:8, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
    7. Zuzana Brokesova & Cary Deck & Jana Peliova, 2016. "Bringing a Natural Experiment into the Laboratory: the Measurement of Individual Risk Attitudes," Working Papers 16-06, Chapman University, Economic Science Institute.
    8. Mehmet Burak Kahyaoglu & Ozgur Ican, 2017. "Risk Aversion and Emotions in DoND," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(1), pages 32-46, January.

    More about this item

    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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