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Revealed preferences over risk and uncertainty

Author

Listed:
  • Matthew Polisson

    (University of St Andrews)

  • John K.-H. Quah

    (Johns Hopkins University)

  • Ludovic Renou

    (Queen Mary University of London)

Abstract

We develop a nonparametric procedure, called the lattice method, for testing the consistency of contingent consumption data with a broad class of models of choice under risk and under uncertainty. Our method allows for risk loving and elation seeking behaviour and can be used to calculate, via Afriat’s efficiency index, the magnitude of violations from a particular model of choice. We evaluate the performance of different models (including expected utility, disappointment aversion, rank dependent utility, mean-variance utility, and stochastically monotone utility) in the data collected by Choi et al. (2007), in terms of pass rates, power, and predictive success.

Suggested Citation

  • Matthew Polisson & John K.-H. Quah & Ludovic Renou, 2017. "Revealed preferences over risk and uncertainty," Working Papers 822, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:822
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    References listed on IDEAS

    as
    1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    2. 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.
    3. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
    4. Varian, Hal R, 1988. "Estimating Risk Aversion from Arrow-Debreu Portfolio Choice," Econometrica, Econometric Society, vol. 56(4), pages 973-979, July.
    5. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    6. Selten, Reinhard, 1991. "Properties of a measure of predictive success," Mathematical Social Sciences, Elsevier, vol. 21(2), pages 153-167, April.
    7. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    expected utility; rank dependent utility; disappointment aversion; Bronars power; predictive success; generalized axiom of revealed preference; first order stochastic dominance; mean-variance utility; Afriat’s efficiency index;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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