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Revealed preferences over risk and uncertainty

Listed author(s):
  • Matthew Polisson

    ()

    (Institute for Fiscal Studies)

  • John Quah

    (Institute for Fiscal Studies)

  • Ludovic Renou

    (Institute for Fiscal Studies)

Consider a finite data set where each observation consists of a bundle of contingent consumption chosen by an agent from a constraint set of such bundles. We develop a general procedure for testing the consistency of this data set with a broad class of models of choice under risk and under uncertainty. Unlike previous work, we do not require that the agent has a convex preference, so we allow for risk loving and elation seeking behavior. Our procedure can also be extended to calculate the magnitude of violations from a particular model of choice, using an index first suggested by Afriat (1972, 1973). We then apply this index to evaluate different models (including expected utility and disappointment aversion) in the data collected by Choi et al. (2007). We show that among those subjects exhibiting choice behavior consistent with the maximization of some increasing utility function, more than half are consistent with models of expected utility and disappointment aversion.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W15/25.

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Date of creation: 14 Sep 2015
Handle: RePEc:ifs:ifsewp:15/25
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  1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
  2. Selten, Reinhard, 1991. "Properties of a measure of predictive success," Mathematical Social Sciences, Elsevier, vol. 21(2), pages 153-167, April.
  3. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  4. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  5. Varian, Hal R, 1988. "Estimating Risk Aversion from Arrow-Debreu Portfolio Choice," Econometrica, Econometric Society, vol. 56(4), pages 973-979, July.
  6. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  7. Hal R. Varian, 1983. "Non-parametric Tests of Consumer Behaviour," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 99-110.
  8. Hiroki Nishimura & Efe A. Ok & John K.-H. Quah, 2017. "A Comprehensive Approach to Revealed Preference Theory," American Economic Review, American Economic Association, vol. 107(4), pages 1239-1263, April.
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