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Parametric Recovery Methods: A Comparative Experimental Study

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  • Halevy, Yoram
  • Zrill, Lanny

Abstract

We propose and implement an experimental methodology for comparing the predictive success of various methods for recovering individual preferences from choice data. We apply the proposed approach to a comparison of two parametric recovery methods: Non Linear Least Squares (NLLS) and the Money Metric Index (MMI). The former is based on minimizing the distance between observed and predicted choices while the latter is based on eliminating incompatibility between the ranking information encoded in choices and the ranking induced by the parametric specification. The experiment, in the context of choice under risk, involves a two-part design where choices made by subjects in the first part are used to construct their choice sets in the second part of the experiment in order to separate the predictions of the two recovery methods. We find that the Money Metric Index predicts better than NLLS in all cases and significantly better when the recovered parameters imply non-convex preferences.

Suggested Citation

  • Halevy, Yoram & Zrill, Lanny, 2016. "Parametric Recovery Methods: A Comparative Experimental Study," Microeconomics.ca working papers yoram_halevy-2016-2, Vancouver School of Economics, revised 03 Nov 2016.
  • Handle: RePEc:ubc:pmicro:yoram_halevy-2016-2
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    File URL: http://faculty.arts.ubc.ca/yhalevy/MMI_NLLS.pdf
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    References listed on IDEAS

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    1. Yoram Halevy & Dotan Persitz & Lanny Zrill, 2018. "Parametric Recoverability of Preferences," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1558-1593.
    2. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June.
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    Cited by:

    1. Halevy, Yoram & Persitz, Dotan & Zrill, Lanny, 2017. "Non-parametric bounds for non-convex preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 105-112.

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    More about this item

    Keywords

    Revealed Preference; Recoverability; Identification; Non-Convex Preferences; Pairwise Choice; First-Order Risk Aversion; Portfolio Choice; Laboratory;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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