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

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  • Charles Bellemare
  • Luc Bissonnette
  • Sabine Kroger

Abstract

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.

Suggested Citation

  • Charles Bellemare & Luc Bissonnette & Sabine Kroger, 2007. "Flexible Approximation of Subjective Expectations using Probability Questions -An Application to the Investment Game-," Cahiers de recherche 0734, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0734
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    References listed on IDEAS

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    Cited by:

    1. Charles Bellemare & Luc Bissonnette & Sabine Kröger, 2010. "Bounding preference parameters under different assumptions about beliefs: a partial identification approach," Experimental Economics, Springer;Economic Science Association, vol. 13(3), pages 334-345, September.

    More about this item

    Keywords

    Approximation of subjective expectations; spline interpolation; decision making under uncertainty;

    JEL classification:

    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • D39 - Microeconomics - - Distribution - - - Other

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