the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

randomization devices and the elicitation of ambiguity averse preferences abstract in random incentive mechanisms agents choose from multiple problems and a randomization device selects a single problem to determine payment agents are assumed to act as if they faced each problem on its own while this approach is valid when agents are expected utility maximizers ambiguity averse agents may use the randomization device to hedge and thereby contaminate the data

non transitive choice event splitting effects or framing effects recent studies have examined possible causes of the robust empirical failure of the transitivity axiom of expected utility theory by pitting regret aversion against alternative explanations such as event splitting effects these tests show that cycles replicate when the latter are controlled but are sensitive to changes in problem representation the control for event splitting effects however does not rule out their contribution to cyclical choices in some circumstances an experiment is reported which investigates this possibility cyclical choices are observed that cannot be due to event splitting effects but appear attributable to within event and between act evaluations of decision problems plus framing effects

an empirical application of the information structures model the postal authority case abstract the information structures model is one of the fundamental models of information economics and the theory of information systems it provides a theoretical framework for assessing the normative value of information this paper applies the information structures model to quality control attribute sampling by analyzing a real life situation in the postal authority the paper demonstrates how decision makers can assess the value of information of surveys their cost effectiveness and the value of information of a second survey

attitudes toward risk and the risk return paradox prospect theory explanations this study attempted to explain bowman s risk return paradox in terms of recent research in behavioral decision theory and prospect theory the research emphasized the role of reference or target

lottery choice incentives complexity and decision time this paper reports the results of an experiment on lottery choice in which decision cost is measured as decision making time a simple decision cost model motivates this measurement and the experiment and predicts relationships between incentive mechanism manipulations and decision making time which are borne out in the experiment the decision cost model also suggests that decisions will change in the face of the incentive manipulations in the experiment this suggestion is borne out in a complex decision making environment but not in a simple one specification tests demonstrate that observed changes in subjects behavior are not merely due to changes in subject specific error variance one may conclude from this that the payoff dominance problem is a real issue in complex decision making experiments copyright 1993 by royal economic society

are preferences monotonic testing some predictions of regret theory in this paper the authors demonstrate that the assumption of regret aversion which has been invoked in regret theory to explain several well documented violations of expected utility theory also implies the existence of strict preferences between some stochastically equivalent actions and implies certain systematic violations of monotonicity the authors report an experimental test of these predictions they find that while choices between stochastically equivalent actions are entirely consistent with expected utility theory there is clear evidence of the monotonicity violations predicted by regret theory copyright 1992 by the london school of economics and political science

preference reversals and the independence axiom of all of the paradoxical patterns of behavior reported in laboratory experiments one of the most perplexing for decision theorists is the preference reversal phenomenon a subject in a preference reversal experiment is typically given a choice between a lottery with a high probability of winning a modest amount of money a p bet and a lottery with a low probability of winning a large amount of money a bet the lowest amount of money for which the subject would willingly sell either of these lotteries is also elicited the most common reversal is for a subject to choose the p bet over the bet but to put a higher selling price on the bet preference reversals were first reported by harold lindman 1971 and sarah lichtenstein and paul slovic 1971 in discussing the psychologists discovery of such reversals david grether and charles plott remark the inconsistency is deeper than mere lack of transitivity or even stochastic transitivity it suggests that no optimization principles of any sort lie behind even the simplest of human choices 1979 p 623 this paper offers a simple alternative explanation of documented preference reversals an explanation that does not require the abandonment of the transitivity assumption

do subjects remember the past in many experiments experimenters use the random lottery incentive mechanism and ask many questions to each subject that is at the end of the experiment just one of the questions is picked at random and the subject paid on the basis of their answer to this one question the idea is that subjects should separate the various questions and reply to each as if it were a separate question this procedure is methodologically sound if the subjects preferences obey expected utility eu theory which implies a form of separation but if they do not this incentive mechanism is open to criticism indeed many referees use this argument against the research they argue that subjects do not consider questions separately if the questions are revealed to the subjects one by one then the appropriate alternative hypothesis is that their behaviour evolves with the questions here this hypothesis is tested that the questions already answered affect the answers to the subsequent questions the analysis shows that

values elicited from open ended real experiments abstract the idea that preferences are only revealed by real incentives is deeply embedded in economists worldview consequently evidence from hypothetical experiments has not readily permeated economic thinking one method for determining whether hypothetical experiments provide useful information about preferences is to compare them to similar real goods experiments this study looks at responses elicited by three real experiments we examine the proportion of responses that meet a series of criteria that range from a broad appeal of plausibility to a narrow restriction based on quasi concavity of preferences we argue that these proportions are unreasonably low

reduction of compound lotteries with objective probabilities theory and evidence abstract the reduction of compound lotteries axiom rocl has assumed a central role in the evaluation of behavior toward risk and uncertainty we present experimental evidence on its validity in the domain of objective probabilities our battery of lottery pairs includes simple one stage lotteries two stages compound lotteries and their actuarially equivalent one stage lotteries we find violations of rocl and that behavior is better characterized by a source dependent version of the rank dependent utility model rather than expected utility theory since we use the popular 1 in k random lottery incentive mechanism payment procedure in our main test our experiment explicitly recognizes the impact that this payment procedure may have on preferences thus we also collect data using the 1 in 1 payment procedure we do not infer any violations of rocl when subjects are only given one decision to make these results are supported by both structural estimation of latent preferences as well as non parametric analysis of choice patterns the random lottery incentive mechanism used as payment protocol itself induces an additional layer of compounding by design that might create confounds in tests of rocl therefore we provide a word of caution for experimenters interested in studying rocl for other purposes such as the relationship between ambiguity attitudes and attitudes toward compound lotteries to carefully think about the design to study rocl payment protocols and their interaction with the preferences being elicited

wages business cycles and comparative advantage abstract the standard equilibrium models of business cycles face a puzzling fact that total hours vary greatly over the business cycle without much variation in aggregate wages the model augments the standard rbc model to include lucas span of control distinction between market and non market and managerial and non managerial work makes aggregate wages far less cyclical than individual wages cross sectional comparative advantage between market and non market sector in the workforce substantially increases the response of aggregate hours to shifts in relative productivity as a result the model provides a reconciliation between data and equilibrium macroeconomics

economic theory of choice and the preference reversal phenomenon a reexamination in a recent issue of this review david grether and charles plott 1979 hereinafter referred to as g p presented a series of experiments that show that individual decisions are made in a manner inconsistent with standard preference theory this inconsistency can be illustrated by the following example individuals under suitable laboratory conditions first have a choice between a lottery with a high probability of winning a small sum of money the p bet probability bet and a lottery with a high stake but low probability of winning the m bet money bet after indicating a preference for one of the lotteries in the pair the same subjects are then asked to place a monetary value on each of the individual lotteries grether and plott found that a large number of participants stated a preference for the p bet in the first round but placed a higher value on the other lottery the m bet in the second round this behavior a preference reversal is inconsistent with the traditional statements of preference theory

changes in u s wages 1976 2000 ongoing skill bias or major technological change this article examines the determinants of changes in the u s wage structure from 1976 to 2000 our main empirical observation is that changes in both the level of wages and the returns to skill over this period were primarily driven by changes in the ratio of human capital to physical capital we show that this pattern conforms extremely well to a simple model of technological adoption following a major change in technological opportunities in contrast we do not find much empirical support for the view that ongoing factor augmenting skill biased technological progress has been an important driving force over this period

evaluating predictions of change this article applies a technique developed by robert c merton 1981 and roy d henriksson and robert c merton 1981 for evaluating the market timing of financial managers to macroeconomic predictions of change this methodology may be used to determine whether the predictions may be of value to the user as an illustration the methodology is applied to a set of real gross national product forecasts copyright 1990 by the university of chicago

evaluating federal reserve predictions of growth in consumer spending this study shows that federal reserve forecasts of growth in both total consumption and durable spending are generally rational under asymmetric loss and the forecasts of growth in nondurable services spending while unbiased biased fail to be rational yet these forecasts are all directionally accurate the forecasts of growth in total consumption durable and services spending are more less accurate in predicting the downward upward moves and are thus of value when policymakers assign more less cost to incorrect downward upward predictions the forecasts of growth in nondurable spending are equally accurate in predicting the downward and upward moves and are thus of value when policymakers assign similar cost to both incorrect downward and upward predictions utilizing survey data to measure the private forecasts we further provide partial support for the asymmetric information hypothesis that the federal reserve has useful information about the state of the economy that is not known by

rationality of inflation output forecasts of mms survey international evidence we analyse the individual rationality of inflation and output forecasts from money market survey mms for a group of g7 countries and eu under asymmetric univariate linlin and linex loss functions we also test for joint rationality of inflation output forecasts using the forecast rationality test under multivariate asymmetric loss functions proposed by ulu 2013 our results indicate that rationality is often rejected under symmetric loss and results improve towards rationality when asymmetric loss functions are assumed the assumption of multivariate asymmetric loss compared to univariate asymmetric loss provides further evidence towards rationality we also analyse directional forecast accuracy of the inflation and output forecasts and find that the inflation output forecasts of mms are valuable when considered both jointly and separately

market experience eliminates some anomalies and creates new ones we report two experiments which investigate whether experience of decision making in repeated markets purges behaviour of preference reversals we investigate two behavioural mechanisms that may be shaping bids in repeated auctions a tendency to adjust bids towards previously observed market prices and a tendency to reduce bids following bad market outcomes we find little support for the former but strong support for the latter also whilst just enough market exposure eliminates the typical preference reversal phenomenon continued exposure fosters the mirror image anomaly therefore although market experience shapes behaviour in our experiments it does not generally promote consistency with standard preference theory

do financial indicators have directional predictability for us home sales abstractthis study investigates the directional predictability of financial indicators for home sales across tranquil 1984 2005 and volatile 1972 1983 and 2006 2013 periods we find that the mortgage rate has directional predictability for both existing and newly built home sales for up to 2005 the federal funds rate generally has directional predictability for existing newly built home sales in 1984 2005 1972 1983 the term spread has directional predictability for home sales in 1972 1983 but generally not in the tranquil period of 1984 2005 further unlike mortgage and federal funds rates the term spread has directional predictability for home sales in 2006 2013 and thus can help the fed with useful information assuming that this trend continues

choices involving uncertain probabilities abstract this paper contains an analytic and empirical component the analytic one examines how people should value information on probabilities versus payoffs according to expected utility theory it also examines under what conditions various generalized utility models such as subjective expected utility theory prospect theory and rank dependent utility entail testable predictions for preference for information the empirical component examines people s actual information preferences and to what extent they fit the various models after describing two experiments and their findings it is concluded that generalized utility models are unlikely to offer much insight into risky decision making

the common consequence effect testing a unified explanation of recent mixed evidence abstract the common consequence effect is perhaps the most investigated violation of expected utility theory and yet no single generalised expected utility model convincingly organises the experimental data this paper reports a test of a modified version of expected cardinality specific utility theory with boundary effects neilson w s 1992 economics letters 39 275 278 which can explain some recent mixed evidence without recourse to subjective probability weighting models the results do not convincingly support the boundary effect hypothesis and neither support the more usual probability weighting arguments but do indicate instability in preferences largely consistent with event splitting effects

preference reversals without the independence axiom the preference reversal phenomenon was believed to be inconsistent with the transitivity axiom of decision theory however recent theoretical papers have demonstrated that the preference reversals that were observed in earlier experiments could be explained by subject violations of the independence axiom or the compound lottery axiom therefore those preference reversals are not known to be inconsistent with generalization of expected utility theory that replace the independence axiom the present paper reports the results of experiments in which a substantial proportion of subject responses violate the asymmetry axiom these results are inconsistent with expected utility theory and its generalizations copyright 1989 by american economic association

alcohol and self control a field experiment in india this paper studies alcohol consumption among low income workers in india in a 3 week field experiment the majority of 229 cycle rickshaw drivers were willing to forgo substantial monetary payments in order to set incentives for themselves to remain sober thus exhibiting demand for commitment to sobriety randomly receiving sobriety incentives significantly reduced daytime drinking while leaving overall drinking unchanged i find no evidence of higher daytime sobriety significantly changing labor supply productivity or earnings in contrast increasing sobriety raised savings by 50 percent an effect that does not appear to be solely explained by changes in income net of alcohol expenditures

directional forecasts of gdp and inflation a joint evaluation with an application to federal reserve predictions many studies have undertaken separate analyses of the fed s forecasts of real gross domestic product gdp growth and inflation this article presents a method for jointly evaluating the direction of change predictions of these variables we conclude that some of the inflation forecasts examined separately were not valuable however the joint pattern of gdp and inflation projections was generally in accord with the economy s movements directional forecasting is now an increasingly popular metric for forecasting performance pesaran and timmermann 2004 414

does customer satisfaction have directional predictability for u s discretionary spending abstractresearch indicates that past growth in customer satisfaction is an important factor in explaining the in sample behaviour of growth in discretionary spending motivated by such evidence we take an out of sample forecasting approach to examine whether customer satisfaction has directional predictability for two types of discretionary spending these include spending on motor vehicles and spending on recreation services which display frequent negative growth for the period 1995 2015 our results indicate that customer satisfaction accurately predicts the direction of change in both types of spending under symmetric loss to augment we further show that the widely reported consumer sentiment has no directional predictability for either types of discretionary spending

mortgage choice as a natural field experiment on choice under risk data on approximately 280 000 borrowers from the uk survey of mortgage lenders are used to model choices between variable and fixed rate mortgages the choice is assumed to depend on three factors risk attitude interest rate expectations and individual discount rate the ordered probit model is used for estimation while taking account of a number of econometric issues including missing counterfactuals selectivity and endogeneity a large number of strong effects are found including higher income borrowers are less risk averse and have a lower discount rate and risk aversion rises with the amount borrowed providing evidence of increasing relative risk aversion

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

the internal economics of the firm evidence from personnel data we analyze twenty years of personnel data from one firm the hierarchical structure is quite simple and stable career movements suggest that the employee s rate of learning and the firm s learning about ability are important there are promotion fast tracks exit rates vary little with tenure or salary the firm has personnel policies like those described in the internal labor markets literature although several theoretical preconditions for ilms such as ports of entry and exit are lacking job levels are important to compensation but there is also substantial individual variation in pay within levels our companion paper in this issue explores the wage policy of this firm

rational expectations and macroeconomic forecasts the article presents extensive results from testing for bias and serially correlated errors in a collection of time series of quarterly multiperiod forecasts for six variables including real gnp growth inflation and unemployment the analysis covers responses by 79 frequent participants in economic outlook surveys conducted regularly since 1968 it shows much greater incidence of apparently systematic errors for inflation than for the other variables also the tests are more favorable to composite group forecasts than to most of the individual forecast sets

the informational content of surnames the evolution of intergenerational mobility and assortative mating we propose a new methodology for measuring intergenerational mobility in economic well being our method is based on the joint distribution of surnames and economic outcomes it circumvents the need for intergenerational panel data a long standing stumbling block for understanding mobility it does so by using cross sectional data alongside a calibrated structural model to recover the traditional intergenerational elasticity measures our main idea is simple if inheritance is important for economic outcomes then rare surnames should predict economic outcomes in the cross section this is because rare surnames are indicative of familial linkages if the number of rare surnames is small this approach will not work however rare surnames are abundant in the highly skewed nature of surname distributions from most western societies we develop a model that articulates this idea and shows that the more important is inheritance the more informative will be surnames this result is robust to a variety of different assumptions about fertility and mating we apply our method using the 2001 census from catalonia a large region of spain we use educational attainment as a proxy for overall economic well being a calibration exercise results in an estimate of the intergenerational correlation of educational attainment of 0 60 we also find evidence suggesting that mobility has decreased among the different generations of the 20th century a complementary analysis based on sibling correlations confirms our results and provides a robustness check on our method our model and our data allow us to examine one possible explanation for the observed decrease in mobility we find that the degree of assortative mating has increased over time overall we argue that our method has promise because it can tap the vast mines of census data that are available in a heretofore unexploited manner

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

observing violations of transitivity by experimental methods the preference reversal phenomenon is usually interpreted as evidence of nontransitivity of preference but has also been explained as the result of the difference between individuals responses to choice and valuation problems the devices used by experimenters to elicit valuations and the random lottery selection incentive system this paper reports an experiment designed so that none of these factors could generate systematic nontransitivities yet systematic violations of transitivity were still found the pattern of violation was analogous with that found in previous preference reversal experiments and is consistent with regret theory copyright 1991 by the econometric society

rational choice with status quo bias abstract motivated by the empirical findings concerning the importance of one s current situation on her choice behavior the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias and that incorporates the standard choice theory as a special case we follow a revealed preference approach and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect and that are applicable in any choice situation to which the standard static choice model applies

further evidence of the impact of regret and disappointment in choice under uncertainty a preliminary experimental study of the relative impact of regret and disappointment on individual choice under uncert ainty is followed up and extended in various ways taken in conjuncti on with the earlier work the new results provide further evidence of the limitations of von neumann morgenstern expected utility theory a nd indicate the potential power of the alternative models discussed it is argued that there is sufficient weight of evidence to encourage further systematic investigation copyright 1988 by the london school of economics and political science

understanding preference imprecision the term preference imprecision seems to have different meanings to different people in the literature one can find references to a number of expressions for example vagueness incompleteness randomness unsureness indecisiveness and thick indifference curves some of these are theoretical constructs some are empirical the purpose of this paper is to survey the various different approaches and to try to link them together to see if they are all addressed to the same issue and to come to some conclusions in the course of this survey we report on evidence concerning the existence of preference imprecision and its impact on theoretical and empirical work

measuring consumers willingness to pay at the point of purchase abstract economists psychologists and marketing researchers rely on measures of consumers willingness to pay wtp in estimating demand for private and public goods and in designing optimal price schedules existing market research techniques for measuring wtp differ in whether they provide an incentive to consumers to reveal their true wtp and in whether they simulate actual point of purchase contexts the authors present an empirical comparison of several procedures for eliciting wtp that are applicable directly at the point of purchase in particular the authors test the applicability of becker degroot and marschak s 1964 well known incentive compatible procedure for assessing the utility of lotteries to measuring consumers wtp in three studies the authors explore the reliability validity and feasibility of the procedure and show that it yields lower wtp estimates than do non incentive compatible methods such as open ended and double bounded contingent valuation they show experimentally t

indifference or indecisiveness choice theoretic foundations of incomplete preferences abstract a commonly held belief in economics is that an individual s preferences that are revealed by her choices must be complete this paper takes issue with this position by showing that one may be able to distinguish between indifference and indecisiveness of an agent upon observing her choice behavior we relax the standard weak axiom of revealed preferences warp and show that a potent theory of individual choice with and without risk can be founded on this weaker axiom when it is coupled with some other standard postulates the most notable features here are that an agent is allowed to be indifferent between certain alternatives and indecisive about others moreover an outside observer can identify which of these actually occur upon examining the observable choice behavior of the decision maker as an application we also show how our theory may be able to cope with the classical preference reversal phenomenon

monotone matching in perfect and imperfect worlds we study frictionless matching in large economies with and without market imperfections providing sufficient conditions for monotone matching that are weaker than those previously known necessary conditions which depend on a key analytical object we call the surplus function are also offered changes in the surplus yield valuable information about the comparative statics of matching patterns across environments we apply our framework to some examples adapted from the literature accounting for and extending several comparative static and welfare results we also explore the dependence of the matching pattern on the type distribution

risk aversion in the theory of expected utility with rank dependent probabilities expected utility with rank dependent probability theory is a model of decision making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes this paper defines based on g teaux differentiability measures of risk aversion for such preferences which characterize the relation more risk averse and applies these measures to the analysis of unconditional and conditional portfolio choice problems

occupational choice and development abstract the rise in world trade since 1970 has been accompanied by a rise in the geographic span of control of management and hence also a rise in the effective international mobility of labor services we study the effect of such a globalization of the world s labor markets the world s welfare gains depend positively on the skill heterogeneity of the world s labor force we find that when people can choose between wage work and managerial work the worldwide labor market raises output by more in the rich and the poor countries and by less in the middle income countries this is because the middle income countries experience the smallest change in the factor price ratio and where the option to choose between wage work and managerial work has the least value in the integrated economy our theory also establishes that after economic integration the high skill countries see a disproportionate increase in managerial occupations using aggregate data on gdp openness and occupations from 115 countries we find evidence for these patterns of occupational choice

inherent inequality and the optimal graduation of marginal tax rates in most countries marginal tax rates increase with income this is at variance with the results of the optimal income taxation literature whose numerical calculations have established the presumption that optimal marginal tax rates should decline with income have the existing results of optimal income tax literature therefore established a presumption that the observed pattern is suboptimal the object of this paper is to attempt to answer this question the numerical calculations that followed mirrlees s 1971 pioneering contribution tried many variations on his basic parametrisation including different preference structures and different functional forms however so far as we are aware most of the reported results maintain his basic assumption of a log normal distribution of abilities or wages with a standard deviation of logs of 0 39 mirrlees 1971 himself appealed the work of lydall 1969 for this figure but it has become the industry standard we show in this paper that departures from this assumption in particular increases in inherent inequality can alter the qualitative pattern of optimal marginal tax rates dramatically contrary to the currently available calculations we show that the optimal graduation can indeed be such that marginal tax rates increase for the majority of the population which is consistent with the observed pattern but that there continues to exist a significant income range at the top where marginal tax rates decline which of course is counter to the observed pattern

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

intra experimental income effects and risk aversion abstract harrison s 1986 modification of the bekker degroot and marshak 1964 mechanism for eliciting risk preferences is employed to test the hypotheses of expected utility theory with respect to changes in income increasing relative risk aversion and decreasing absolute risk aversion subjects in the laboratory are shown to exhibit such behavior

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

does realism matter in contingent valuation surveys the importance of stressing the realism or policy relevance of a contingent valuation cv survey is commonly recognized by cv researchers this paper focuses on the relationship between the probability that a subject s response will result in real consequences and the subject s accurate reporting of willingness to pay results from experiments support the argument that efforts to make contingent valuation surveys real are important however our results also suggest that the connection between the survey and the likelihood of a payment must be rather powerful before surveys generate accurate reporting of willingness to pay for a public good

venture theory a model of decision weights several theories suggest that people replace probabilities by decision weights when evaluating risky outcomes this paper proposes a model called venture theory of how people assess decision weights it is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values the amount of mental simulation is affected by the absolute size of payoffs the extent to which the anchor deviates from the extremes of 0 and 1 and the level of perceived ambiguity concerning the relevant probability the net effect of the adjustment i e up or down vis i vis the anchor reflects the relative weight given in imagination to values above as opposed to below the anchor this in turn is taken to be a function of both individual and situational variables and in particular the sign and size of payoffs cognitive and motivational factors therefore both play important roles in determining decision weights assuming that people evaluate outcomes by a prospect theory value function kahneman and tversky 1979 and are cautious in the face of risk fourteen predictions are derived concerning attitudes toward risk and ambiguity as functions of different levels of payoffs and probabilities the results of three experiments are reported whereas only a subset of the model s predictions can be tested in experiment 1 all fourteen are tested in experiments 2 and 3 using hypothetical and real payoffs respectively several of the model s predictions are not supported in experiment 2 but almost all are validated in experiments 1 and 3 the failures relate to the exact nature of probability payoff interactions in attitudes toward risk and ambiguity for losses the theory and results are discussed in relation to other experimental evidence future tests of the theory alternative models of risky choice and implications of venture theory for explaining further phenomena

prospect theory and energy efficiency abstract investments in energy efficiency entail uncertainty and when faced with uncertainty consumers have been shown to behave according to prospect theory preferences are reference dependent and exhibit loss aversion and probabilities are subjectively weighted using data from a choice experiment eliciting prospect theory parameters i provide evidence that loss averse people are less likely to invest in energy efficiency then i consider policy design under prospect theory when there are also externalities from energy use a higher degree of loss aversion implies a higher subsidy to energy efficiency numerical simulations suggest that the impact of prospect theory on policy may be substantial

predicting gasoline prices using michigan survey data abstract this study investigates the predictive power of michigan surveys of consumers msc data for gasoline prices specifically we utilize the msc data on both expected inflation and consumer sentiment to construct a vector autoregressive var model for forecasting gasoline prices for 2003 2014 our findings indicate that the var forecasts are superior to the comparable benchmark forecasts obtained from a univariate integrated moving average ma model in terms of both predictive information content and directional accuracy as such we conclude that the msc data on both expected inflation and consumer sentiment have significant predictive information for gasoline prices further inspection reveals that the var forecasts are particularly accurate for the period since 2008 reinforcing the notion that consumers are economically rational

are government and imf forecasts useful an application of a new market timing test abstract we investigate the directional accuracy of gdp and price forecasts by the japanese government and the imf with a new method developed by pesaran and timmermann pesaran m h timmermann a 2009 testing dependence among serially correlated multi category variables journal of the american statistical association 485 325 337 extending the literature to government forecasts our results illustrate an empirical application of the new test our findings provide positive evidence about the usefulness of imf forecasts whereas they cast doubts about government forecasts

a directional evaluation of corporate executives exchange rate forecasts we investigate the directional accuracy of exchange rate forecasts by corporate executives we find that a forecast with a 1 year horizon is valuable for the profitability and unprofitability predictions of manufacturers although previous studies provide considerable evidence that forecasts with horizons of 1 year and longer are not valuable however a forecast is not valuable in predicting an appreciation or depreciation of the exchange rate our findings suggest that corporate executives are more concerned about and focused on the impact of the exchange rate on their profitability rather than the exchange rate itself

wage inequality segregation by skill and the price of capital in an assignment model abstract some pieces of empirical evidence suggest that in the u s from the 1970s to the 1990s i wage inequality between plants rose much more than wage inequality within plants and ii there was an increase in the segregation of workers by skill into separate plants this paper presents a frictionless assignment model in which these two features can be explained simultaneously as the result of the decline in the relative price of capital additional implications of the model regarding the skill premium and the dispersion in labor productivity across plants are also consistent with the empirical evidence the model permits to consider changes in the skill distribution too combining these changes with falling capital prices provides a more comprehensive view of the overall trend of wage inequality and of workers segregation by skill in the data and it helps explaining some episodes of decreasing wage inequality

payoff dominance vs cognitive transparency in decision making i introduction there is a general question about how well laboratory markets work in eliciting true preferences given the low opportunity costs of making errors as in harrison 1989 vernon smith 1982 set out a series of conditions that must be adhered to if a laboratory market investigation is to provide insight into economic behavior in naturally occurring markets the opportunity cost question posed above is covered under smith s payoff dominance and reward saliency precepts for laboratory market experiments if the experimental setting is to elicit true preferences from the subjects the monetary payoffs in the experiment must be salient and dominate potential extraneous influences on subject behavior this paper reports on three series of experiments which employ the becker degroot marshak bdm mechanism to investigate the interaction between payoff dominance reward saliency and cognitive effort in the decision task the bdm mechanism is well suited to this task because it involves only individual choice is theoretically incentive compatible and offers a high degree of experimenter control over payoffs initial information and feedback on the results of decisions becker degroot and marschak 1964 introduced the following preference elicitation mechanism individuals state the most they would be willing to pay wtp 1 for a good then a random price is drawn from a distribution known to the individuals if the stated value is greater than or equal to the random price the individual buys the good at the randomly determined price otherwise the individual does not buy the good the bdm bidding mechanism can be shown to be incentive compatible the intuition is straightforward it is not in the individual s interest to understate true wtp if the random buying price falls between the stated wtp and the true wtp the individual has foregone a beneficial trade it is also not in an individual s interest to overstate true wtp if the random buying price is greater than the true value but less than the stated value the individual will be required to buy the good at a price greater than true wtp a more formal proof is easy to construct 2 let v the true value of one unit of the auction good b the bid submitted to purchase one unit of the good r the price randomly determined to be paid if the good is purchased p r probability that price r is randomly selected y sup o initial income u y utility a function of money income and the value of the good and e initial monetary balance provided in an experiment in the wtp version of the bdm auction the good is purchased if b greater than or equal to r with the subject paying only r and not purchased if b less than r in experiments using the bdm the subject cannot bid more than the experimental balance e so it must be that v less than e if the experiment is to be demand revealing assuming that subjects maximize expected utility they will submit bid b that maximizes eu integral of p r u y sup o e v r dr between limits b and 0 integral of p r u y sup o e dr between limits e and b the first integral describes the expected payoff for random prices r below the bid b and the second integral describes the expected payoff for random prices between the bid b and the maximum possible bid as limited by the balance e the maximum over b occurs when the derivative of eu with respect to b is zero in other words when deu db p b u y e v b u y e 0 so long as p b greater than 0 i e there is some probability the offered bid will be the price the above implies that the maximum occurs when b v in other words it is individually optimal to submit a bid b equal to one s true value v for the commodity although the bdm is incentive compatible in theory it is an empirical question whether it has this property in practice

the effects of imprecise probabilities and outcomes in evaluating investment options vagueness attitudes have been used to explain anomalies and irregularities in investment behavior it is generally assumed ellsberg 1961 that decision makers dms dislike vagueness but this assumption has been challenged by empirical results documenting systematic alternative attitudes to vagueness as a function of its source the domain of the decisions and the response mode used we investigate these three factors in a within subjects design that was embedded in an investment context dms evaluated investment options that varied in terms of their sources of vagueness probabilities and or outcomes in both domains gains or losses and employed two response modes pricing or choice we confirm that individuals vagueness attitudes are malleable contingent on the dimension salience and the reference domain in particular we observed three distinct patterns of reversals of attitudes towards vagueness our results indicate that the ability of vagueness attitudes to predict investment behavior is limited as decisions can be systematically influenced by task context and or perceived gain or loss positions economic models may be improved by incorporating more flexible assumptions about individuals attitudes toward vagueness