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

  • Charles Bellemare
  • Luc Bissonnette
  • Sabine Kroger

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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  1. repec:dgr:kubcen:200582 is not listed on IDEAS
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