ABSTRACT.The theoretical literature has a rich characterization of scoring rules for eliciting the subjective beliefs that an individual has for continuous events, but under the restrictive assumption of risk neutrality. It is well known that risk aversion can dramatically affect the incentives to correctly report the true subjective probability of a binary event. Alternatively, one must carefully calibrate inferences about true subjective probabilities from elicited subjective probabilities over binary events, recognizing the incentives that risk averse agents have to report the same probability for the two outcomes and reduce the variability of payoffs from the scoring rule. We characterize the comparable implications of the general case of a risk averse agent when facing a popular scoring rule over continuous events, and find that these concerns do not apply with anything like the same force. For empirically plausible levels of risk aversion, one can reliably elicit most important features of the latent subjective belief distribution without undertaking calibration for risk attitudes. †
The reduction of compound lotteries (ROCL) has assumed a central role in the evaluation of behavior towards risk and uncertainty. We present experimental evidence on its validity in the domain of objective probabilities. Our experiment explicitly recognizes the impact that the random lottery incentive mechanism payment procedure may have on preferences, and so we collect data using both "1-in-1" and "1-in-K" payment procedures, where K>1. We do not find violations of ROCL when subjects are presented with only one choice that is played for money. However, when individuals are presented with many choices and random lottery incentive mechanism is used to select one choice for payoff, we do find violations of ROCL. These results are supported by both non-parametric analysis of choice patterns, as well as structural estimation of latent preferences. We find evidence that the model that best describes behavior when subjects make only one choice is the Rank-Dependent Utility model. When subjects face many choices, their behavior is better characterized by our source-dependent version of the Rank-Dependent Utility model which can account for violations of ROCL. We conclude that payment protocols can create distortions in experimental tests of basic axioms of decision theory.
J.T. Swarthout). 1 Risk attitudes are only synonymous with diminishing marginal utility under expected utility theory. But diminishing marginal utility also plays a confounding role under many of the prominent alternatives to expected utility theory, such as rank-dependent utility theory and prospect theory. 0167-2681/$ -see front matter
We evaluate a binary lottery procedure for inducing risk neutral behavior in a subjective belief elicitation task. Prior research has shown this procedure to robustly induce risk neutrality when subjects are given a single risk task defined over objective probabilities. Drawing a sample from the same subject population, we find evidence that the binary lottery procedure also induces linear utility in a subjective probability elicitation task using the Quadratic Scoring Rule. We also show that the binary lottery procedure can induce direct revelation of subjective probabilities in subjects with popular Non-Expected Utility preference representations that satisfy weak conditions.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.