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

  • Bellemare, Charles

    ()

    (Université Laval)

  • Bissonnette, Luc

    ()

    (Laval University)

  • Kröger, Sabine

    ()

    (Université Laval)

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 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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  1. Arthur van Soest & Charles Bellemare & Sabine Kroger, 2005. "Actions and beliefs: Estimating distribution-based preferences using a large scale experiment with probability questions on expectations," Artefactual Field Experiments 00007, The Field Experiments Website.
  2. Yaw Nyarko & Andrew Schotter, 2002. "An Experimental Study of Belief Learning Using Elicited Beliefs," Econometrica, Econometric Society, vol. 70(3), pages 971-1005, May.
  3. J. Dominitz & C. F. Manski, . "Using expectations data to study subjective income expectations," Institute for Research on Poverty Discussion Papers 1050-94, University of Wisconsin Institute for Research on Poverty.
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  5. Joseph Engelberg & Charles F. Manski & Jared Williams, 2006. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," NBER Working Papers 11978, National Bureau of Economic Research, Inc.
  6. McKenzie, David & Gibson, John & Stillman, Steven, 2007. "A Land of Milk and Honey with Streets Paved with Gold: Do Emigrants Have Over-Optimistic Expectations about Incomes Abroad?," IZA Discussion Papers 2788, Institute for the Study of Labor (IZA).
  7. Charness, Gary & Rabin, Matthew, 2002. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series qt3d04q5sm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Engelmann Dirk & Strobel Martin, 2002. "Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments," Research Memorandum 015, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
  9. Manski, Charles F., 2002. "Identification of decision rules in experiments on simple games of proposal and response," European Economic Review, Elsevier, vol. 46(4-5), pages 880-891, May.
  10. Nava Ashraf & Iris Bohnet & Nikita Piankov, 2006. "Decomposing trust and trustworthiness," Experimental Economics, Springer, vol. 9(3), pages 193-208, September.
  11. Magnac & Thesmar, 2002. "Identifying dynamic discrete decision processes," Working Papers 155888, Institut National de la Recherche Agronomique, France.
  12. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  13. Eckel, Catherine C. & Wilson, Rick K., 2004. "Is trust a risky decision?," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 447-465, December.
  14. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  15. Oxoby, Robert J. & McLeish, Kendra N., 2004. "Sequential decision and strategy vector methods in ultimatum bargaining: evidence on the strength of other-regarding behavior," Economics Letters, Elsevier, vol. 84(3), pages 399-405, September.
  16. Cox, James C., 2004. "How to identify trust and reciprocity," Games and Economic Behavior, Elsevier, vol. 46(2), pages 260-281, February.
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