An experimental test of prospect theory for predicting choice under ambiguity

Kothiyal, Amit; Spinu, Vitalie; Wakker, Peter P.

doi:10.1007/s11166-014-9185-0

Cited by 54 publications

(33 citation statements)

References 69 publications

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“…One puzzle in the literature is provided by the widespread use of POR rather than PAS to test hypotheses for CPT; see, for examples, papers by Birnbaum (2004Birnbaum ( , 2008, Kothiyal et al (2014), Rutström (2009), andWakker et al (2007). It was generally known after results in Holt (1986) that POR places crucial reliance on the independence axiom that was subsequently explicitly discarded under CPT (Tversky and Kahneman 1992), which makes POR inappropriate for tests of CPT with internal theoretical validity.…”

Section: All or Nothing Approach To Testing A Theorymentioning

confidence: 99%

Paradoxes and mechanisms for choice under risk

2014

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Experiments on choice under risk typically involve multiple decisions by individual subjects. The choice of mechanism for selecting decision(s) for payoff is an essential design feature unless subjects isolate each one of the multiple decisions. We report treatments with different payoff mechanisms but the same decision tasks. The data show large differences across mechanisms in subjects' revealed risk preferences, a clear violation of isolation. We illustrate the importance of these mechanism effects by identifying their implications for classical tests of theories of decision under risk. We discuss theoretical properties of commonly used mechanisms, and new mechanisms introduced herein, in order to clarify which mechanisms are theoretically incentive compatible for which theories. We identify behavioral properties of some mechanisms that can introduce bias in elicited risk preferences-from cross-task contaminationeven when the mechanism used is theoretically incentive compatible. We explain that selection of a payoff mechanism is an important component of experimental design in many topic areas including social preferences, public goods, bargaining, and choice under uncertainty and ambiguity as well as experiments on decisions under risk.

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Section: All or Nothing Approach To Testing A Theorymentioning

confidence: 99%

Paradoxes and mechanisms for choice under risk

2014

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“…We use the source method (Abdellaoui et al 2011), a tractable specification of biseparable utility based on Chew & Sagi's (2008) axioms. In Kothiyal, Spinu, & Wakker (2014), the source method predicted ambiguous choices better than a number of popular alternative models. We will also discuss our results from the perspective of the popular α-maxmin model (Ghirardato et al 2004).…”

Section: Related Literaturementioning

confidence: 99%

The Rich Domain of Ambiguity Explored

Müller

Wakker

et al. 2018

Management Science

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. ABSTRACT. Ellsberg and others suggested that decision under ambiguity is a rich empirical domain with many phenomena to be investigated beyond the Ellsberg urns. We provide a systematic empirical investigation of this richness by varying both the uncertain events, the outcomes, and combinations of these. Although ambiguity aversion is prevailing, we also find systematic ambiguity seeking, confirming insensitivity. We find that ambiguity attitudes depend on the source of uncertainty (the kind of uncertain event) but not on the outcomes. Ambiguity attitudes are closer to rationality (ambiguity neutrality) for natural uncertainties than for the Ellsberg urns, as appearing from the reductions of monotonicity violations and of insensitivity. Terms of use: Documents in EconStor mayOur rich domain serves well to test families of weighting functions for fitting ambiguity attitudes.We find that two-parameter families, capturing not only aversion but also insensitivity, are desirable for ambiguity even more than for risk. The Goldstein-Einhorn family performs best for ambiguity.

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“…The two components together depict a comprehensive picture of people's ambiguity attitude. Empirically, models with these two components have been shown to have better predicative power than others (Kothiyal et al 2014). …”

Section: Definition 3 the A-insensitivity Index Ismentioning

confidence: 99%

Are the poor worse at dealing with ambiguity?

2017

J Risk Uncertain

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This paper studies the relationship between people's ambiguity attitudes and income in the field using language as a natural source of ambiguity. It shows that the method of Baillon et al. (2017b) can be adapted for field studies, providing ambiguity measurement tasks that are more comprehensible for nonacademic subjects. Ambiguity attitudes were elicited in two groups of Chinese adolescents (poor rural and rich urban), among whom the income variation is big. In the rural group the poorer are both more ambiguity averse and more a-insensitive, whereas in the urban group the richer are more a-insensitivite. On average, the poor rural adolescents are worse at dealing with ambiguity than their urban counterparts. A-insensitivity, which measures people's understanding of an ambiguous situation, is an important but sometimes neglected component of ambiguity attitude. Policies aiming to help people improve decisions may focus more on reducing a-insensitivity as this cognitive bias is more likely to be influenced by intervention than people's intrinsic aversion towards ambiguity.

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An experimental test of prospect theory for predicting choice under ambiguity

Cited by 54 publications

References 69 publications

Paradoxes and mechanisms for choice under risk

Paradoxes and mechanisms for choice under risk

The Rich Domain of Ambiguity Explored

Are the poor worse at dealing with ambiguity?

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