The authors demonstrate that ethical judgments can be biased when previous judgments serve as a point of reference against which a current situation is judged. Scenarios describing ethical or unethical sales practices were used in an experiment to prime subjects who subsequently rated the ethics of an ethically ambiguous target scenario. The target tended to be rated as more ethical by subjects primed with unethical scenarios, and less ethical by subjects primed with ethical scenarios. This "contrast effect," however, is contingent (...) upon individual differences. Specifically, subjects with high (versus low) needs for cognition are more likely to process and use the information presented in the priming scenarios as a point of reference against which to judge the target situation, and hence more prone to the contrastive bias. Implications for avoiding unintentional moral relativism in business decision-making are discussed. (shrink)

We test the effect of stake size on ambiguity attitudes. Compared to a baseline condition, we find subjects to be more ambiguity seeking for small-probability gains and large-probability losses under high stakes. They are also more ambiguity averse for large-probability gains and small-probability losses. We trace these effects back to stake effects on decisions under risk and uncertainty. For risk, we replicate previous findings. For uncertainty, we find an increase in probabilistic insensitivity under high stakes that is driven by increased (...) uncertainty aversion for large-probability gains and for small-probability losses. (shrink)

Framing effects occur when different descriptions of the same decision problem give rise to divergent decisions. They can be seen as a violation of the decisiontheoretic version of the principle of extensionality (PE). The PE in logic means that two logically equivalent sentences can be substituted salva veritate. We explore what this notion of extensionality becomes in decision contexts. Violations of extensionality may have rational grounds. Based on some ideas proposed by the psychologist Craig McKenzie and colleagues, we contend that (...) framing effects are justified when the selection of one particular frame conveys choice relevant information. We first discuss this idea from a philosophical point of view, and proceed next to formalize it first in the context of the Bolker–Jeffrey decision theory. Finally, we extend the previous analysis to non-expected utility theories using the Biseparable Preference model introduced by Ghirardato and Marinacci (2001) and therefore show that the analysis is independent of the assumptions of Bayesian decision theory. (shrink)

Sometimes conducting an experiment to ascertain the state of a system changes the state of the system being measured. Kahneman & Tversky modelled this effect with ‘support theory’. Quantum physics models this effect with probability amplitude mechanics. As this paper shows, probability amplitude mechanics is similar to support theory. Additionally, Viscusi's proposed generalized expected utility model has an analogy in quantum mechanics.

This article presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1,935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss-aversion coefficient of (...) 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighting functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. In contrast to previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response toward the probability of obtaining the best possible outcome. (shrink)

Balancing the pros and cons of two options is undoubtedly a very appealing decision procedure, but one that has received scarce scientific attention so far, either formally or empirically. We describe a formal framework for pros and cons decisions, where the arguments under consideration can be of varying importance, but whose importance cannot be precisely quantified. We then define eight heuristics for balancing these pros and cons, and compare the predictions of these to the choices made by 62 human participants (...) on a selection of 33 situations. The Levelwise Tallying heuristic clearly emerges as a winner in this competition. Further refinements of this heuristic are considered in the discussion, as well as its relation to Take the Best and Cumulative Prospect Theory. (shrink)

In this paper, we propose a novel account of desire reports, i.e. sentences of the form 'S wants p'. Our theory is partly motivated by Phillips-Brown's (2021) observation that subjects can desire things even if those things aren't best by the subject's lights. That is, being best isn't necessary for being desired. We compare our proposal to existing theories, and show that it provides a neat account of the central phenomenon.

We consider several puzzles of bounded rationality. These include the Allais- and Ellsberg paradox, the disjunction effect, and related puzzles. We argue that the present account of quantum cognition—taking quantum probabilities rather than classical probabilities—can give a more systematic description of these puzzles than the alternate treatments in the traditional frameworks of bounded rationality. Unfortunately, the quantum probabilistic treatment does not always provide a deeper understanding and a true explanation of these puzzles. One reason is that quantum approaches introduce additional (...) parameters which possibly can be fitted to empirical data but which do not necessarily explain them. Hence, the phenomenological research has to be augmented by responding to deeper foundational issues. In this article, we make the general distinction between foundational and phenomenological research programs, explaining the foundational issue of quantum cognition from the perspective of operational realism. This framework is motivated by assuming partial Boolean algebras. They are combined into a uniform system via a mechanism preventing the simultaneous realization of perspectives. Gleason’s theorem then automatically leads to a distinction between probabilities that are defined by pure states and probabilities arising from the statistical mixture of pure states. This formal distinction relates to the conceptual distinction between risk and ignorance. Another outcome identifies quantum aspects in dynamic macro-systems using the framework of symbolic dynamics. Finally, we discuss several ideas that are useful for justifying complementarity in cognitive systems. (shrink)

Inheritance is the principle that deontic `ought' is closed under entailment. This paper is about a tension that arises in connection with Inheritance. More specifically, it is about two observations that pull in opposite directions. One of them raises questions about the validity of Inheritance, while the other appears to provide strong support for it. We argue that existing approaches to deontic modals fail to provide us with an adequate resolution of this tension. In response, we develop a positive analysis, (...) and show that this proposal provides a satisfying account of our intuitions. (shrink)

In this paper, we present two puzzles involving desire reports concerning series of events. What does a person want to happen in the first event – is it the event with the highest expected return, or the event that is the initial part of the best series? We show that existing approaches fail to resolve the puzzles around this question and develop a novel account of our own. Our semantics is built around three ideas. First, we propose that desire ascriptions (...) are evaluated relative to a contextually supplied set of propositions, or alternatives. The semantic value of an ascription ‘S wants p’ is determined by S's preference ordering over these alternatives. Second, we propose that desire reports carry a requirement to the effect that the prejacent of the ascription must be suitably related to the background set of alternatives. Finally, we suggest that desire reports carry a dominance condition concerning the subject's ranking of the alternatives. Overall, we argue that our theory provides us with an elegant resolution of our puzzles, and yields a promising approach to desire. (shrink)

The analysis of desire ascriptions has been a central topic of research for philosophers of language and mind. This work has mostly focused on providing a theory of want reports, that is, sentences of the form ‘S wants p’. In this paper, we turn from want reports to a closely related but relatively understudied construction, namely hope reports, that is, sentences of the form ‘S hopes p’. We present two contrasts involving hope reports and show that existing approaches to desire (...) fail to explain these contrasts. We then develop a novel account that combines some of the central insights in the literature. We argue that our theory provides an elegant account of our contrasts and yields a promising analysis of hoping. (shrink)

Most research on the corporate philanthropy of organizations has focused on the external benefits of such initiatives for firms, such as benefits for firm reputation and opportunities. However, many firms justify their giving, in part, due to the positive impact it has on their employees. Little is known about the effectiveness of such efforts, or how they can be managed strategically to maximize impact. We hypothesize a main effect of office-level corporate philanthropy on average employee attitudes in that office, but (...) also investigate three strategies that offices may use to enhance this impact. Testing our hypotheses with 3 years of data on attitudes of an average of 14,577 employees in 53 offices we find support for the main effect, but mixed support for the specific strategies used to enhance impact. (shrink)

This paper presents an overlapping generations household model with positive assortative matching, incomplete information about partner’s type and a gender pay gap on the labor market. In equilibrium, a gender pay gap creates an excess supply of desirable husbands and women marry early to increase their chance of being matched with an ideal partner, which results in a gender age gap on the marriage market. A modified model with asymmetric information yields a similar result. An extended model where individuals have (...) an option to remain single yields a similar result as well. (shrink)

In decision theory, the betweenness axiom postulates that a decision maker who chooses an alternative A over another alternative B must also choose any probability mixture of A and B over B itself and can never choose a probability mixture of A and B over A itself. The betweenness axiom is a weaker version of the independence axiom of expected utility theory. Numerous empirical studies documented systematic violations of the betweenness axiom in revealed individual choice under uncertainty. This paper shows (...) that these systematic violations can be linked to another behavioral regularity—choice shifts in a group decision making. Choice shifts are observed if an individual faces the same decision problem but makes a different choice when deciding alone and in a group. (shrink)

Risk preferences of Australian academics are elicited by analyzing the aggregate distribution of their retirement funds across available investment options. Not more than 10 % of retirement funds are invested as if their owners maximize expected utility under the assumption of constant relative risk aversion with an empirically plausible level of risk aversion. An implausibly high level of risk aversion is required to rationalize any investment into bonds when stocks are available. Not more than 36.54 % of all investments can (...) be rationalized by a model of loss averse preferences. Moreover, the levels of loss aversion typically reported in the experimental studies imply overinvestment in bonds, which is not observed in the data. Up to 67.18 % of all investments can be rationalized by rank-dependent utility or Yaari’s dual model with empirically plausible parameters. A median Australian academic behaves as if maximizing rank-dependent utility with parameter γ∈[0.76,0.79]\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$\gamma \in [0.76, 0.79]$$\end{document} in a Tversky and Kahneman probability weighting function. (shrink)

In the television show Deal or No Deal a contestant is endowed with a sealed box, which potentially contains a large monetary prize. In the course of the show the contestant learns more information about the distribution of possible monetary prizes inside her box. Consider two groups of contestants, who learned that the chances of their boxes containing a large prize are 20% and 80% correspondingly. Contestants in both groups receive qualitatively similar price offers for selling the content of their (...) boxes. If contestants are less risk averse when facing unlikely gains, the price offer is likely to be more frequently rejected in the first group than in the second group. However, the fraction of rejections is virtually identical across two groups. Thus, contestants appear to have identical risk attitudes over (large) gains of low and high probability. (shrink)

Standard models of portfolio investment rely on various statistical measures of dispersion. Such measures favor returns smoothed over all states of the world and penalize abnormally low as well as abnormally high returns. A model of portfolio investment based on the tradeoff between expected return and expected loss considers only abnormally low returns as undesirable. Such a model has a comparative advantage over other existing models in that a first-order stochastically dominant portfolio always has a higher expected return and a (...) lower expected loss. Expected return—expected loss model of portfolio investment can rationalize the equity premium puzzle. Two random variables are not comoving if there is at least one state of the world in which one random variable yields a positive return and the other—a negative return. Such random variables provide hedging benefits from diversification in portfolio investment according to the expected return—expected loss model. A special case of this model, when an investor linearly trade-offs expected returns and expected losses, is also a special case of the prospect theory when a decision-maker has a piece-wise linear value function without any probability weighting. (shrink)

Elicitation methods in decision-making under risk allow us to infer the utilities of outcomes as well as the probability weights from the observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes the inevitable distortion of preferences by random errors into account and minimizes the effect of such errors on the inferred utility and probability weighting functions. Under mild assumptions, the optimally efficient method for eliciting utilities and probability weights is the following three-stage procedure. First, a (...) probability is elicited whose subjective weight is one half. Second, the utility function is elicited through the midpoint chaining certainty equivalent method using the probability elicited at the first stage. Finally, the probability weighting function is elicited through the probability equivalent method. (shrink)

In the television show Deal or No Deal, a contestant is endowed with a sealed box containing a monetary prize between one cent and half a million euros. In the course of the show, the contestant is offered to exchange her box for another sealed box with the same distribution of possible monetary prizes inside. This offers a unique natural experiment for studying endowment effects under high monetary incentives. We find evidence of only a weak endowment effect when contestants exchange (...) their box for another box with the same distribution of possible prizes. (shrink)

This paper presents a new decision theory for modelling choice under risk. The new theory is a two-parameter generalization of expected utility theory. The proposed theory assumes that a decision maker: behaves as if maximizing expected utility; but may experience disappointment when the utility of a lottery’s outcome falls short of the expected utility of the lottery; and may have a preference for gambling. The proposed theory can rationalize the fourfold pattern of risk attitudes; the common ratio effect and the (...) reverse thereof ; the Allais paradox in classical common consequence problems and the reverse Allais paradox—in common consequence problems with an even split of a probability mass; violations of the betweenness axiom; switching behavior in the Samuelson’s example; violations of ordinal, upper and lower cumulative independence ; and preference reversals between valuations and choice. In application to insurance, the theory can rationalize full insurance with an actuarially unfair premium and aversion to probabilistic insurance. In application to optimal portfolio investment, the theory can rationalize the equity premium puzzle. (shrink)

Prospect theory emerged as one of the leading descriptive decision theories that can rationalize a large body of behavioral regularities. The methods for eliciting prospect theory parameters, such as its value function and probability weighting, are invaluable tools in decision analysis. This paper presents a new simple method for eliciting prospect theory’s value function without any auxiliary/simplifying parametric assumptions. The method is applicable both to choice under ambiguity (Knightian uncertainty) and risk (when events are characterized by objective probabilities). Our new (...) elicitation method is implemented in a simple paper-and-pencil experiment (via an iterative multiple price list format). This is one of the first experiments that elicits non-parametric prospect theory’s value function with salient rewards. The collected data generally confirm findings in the existing literature: the value function is S-shaped (concave in the gain domain and convex in the loss domain) though there is a weaker loss aversion on the aggregate level and a substantial heterogeneity in loss aversion on the individual level (41% loss averse, 6% loss neutral and 53% gain seeking). (shrink)

Recently proposed models of risky choice imply systematic violations of transitivity of preference. This study explored whether people show the predicted intransitivity of the two models proposed to account for the certainty effect in Allais paradoxes. In order to distinguish “true” violations from those produced by “error,” a model was fit in which each choice can have a different error rate and each person can have a different pattern of preferences that need not be transitive. Error rate for a choice (...) is estimated from preference reversals between repeated presentations of the same choice. Results showed that few people repeated intransitive patterns. We can retain the hypothesis that all participants were transitive. (shrink)

Global supply chains enhance value, but are subject to governance problems and encourage evasive practices that deter sustainability, especially in developing countries. This article proposes that the precontractual environment, where parties are interested in trade but have not yet negotiated formal terms, can enable a unique process for building long-term sustainable relations. We argue that precontractual signals based on relation-specific investments, promises of repeated exchange, and reassuring cheap talk can be leveraged in precontract by the power of framing. We show (...) how these framing signals are amplified in precontract because the lack of credible information, minimal time for reflection, and the role of risk-aversion present in supply chain contract negotiations. The result is a process that is uniquely productive for building long-term and value-generating contractual relations in supply chains, particularly in skeptical or even hostile negotiating contexts. We then show how framed precontractual signals generate a joint contractual surplus through a supernormal profit known as a relational rent. This rent can be invested to improve sustainable practices, an efficient option in a competitive market due to the second order effects that sustainable practices generate. This novel process we propose thus potentially generates superior returns to other trust measures and encourages focus on precontract as a fertile environment for building sustainable investments. (shrink)

Third generation prospect theory is a theory of choices and of judgments of highest buying and lowest selling prices of risky prospects, i.e., of willingness to pay and willingness to accept. The gap between WTP and WTA is sometimes called the “endowment effect” and was previously called the “point of view” effect. Third generation prospect theory combines cumulative prospect theory for risky prospects with the theory that judged values are based on the integration of price paid or price received with (...) the consequences of gambles. In TGPT, the discrepancy between WTP and WTA is due to loss aversion-losses have greater absolute utility than gains of the same value. TGPT was developed independently of similar developments by Birnbaum and Zimmermann :145–187, 1998) and Luce. This paper reviews theoretical and empirical findings, to show that TGPT fails as a descriptive model of both choices and judgments. Evidence refutes three implications of TGPT, but they are consistent with configural weight models in which loss aversion is not needed to describe the results. In the configural weight models, buyers place greater weight on lower consequences, attributes or estimates of value compared to sellers, who place greater configural weight on higher aspects of an object or prospect. (shrink)

Some behavioral economists argue that the honoring of social norms can be adequately modeled as the optimization of social utility functions in which the welfare of others appears as an explicit argument. This paper suggests that the large experimental claims made for social utility functions are premature at best, and that social norms are better studied as equilibrium selection devices that evolved for use in games that are seldom studied in economics laboratories.

I provide an interpretation of Wittgenstein's much criticized remarks on Gödel's First Incompleteness Theorem in the light of paraconsistent arithmetics: in taking Gödel's proof as a paradoxical derivation, Wittgenstein was right, given his deliberate rejection of the standard distinction between theory and metatheory. The reasoning behind the proof of the truth of the Gödel sentence is then performed within the formal system itself, which turns out to be inconsistent. I show that the models of paraconsistent arithmetics (obtained via the Meyer-Mortensen (...) collapsing filter on the standard model) match with many intuitions underlying Wittgensteins philosophy of mathematics, such as its strict finitism and the insistence on the decidability of any meaningful mathematical question. (shrink)

This study investigates the relative importance of trait anger and trait anxiety in financial decision-making. Given the disparate economic, cultural and social environments within an emerging market, this study focuses on South Africa to provide unique insights. The use of a student experimental cohort and hypothetical scenarios allows for the assessment of prima facie evidence of the merits of future research using more experienced participants and more realistic scenarios. Gender and race are incorporated as explanatory variables given the history of (...) South Africa and the disparate opportunities amongst individuals of different races. Both variables are also notable indicators of financial behaviour and decision-making. A questionnaire was completed by 288 university students which measured Trait anxiety and Trait anger using the Anxiety Inventory and Anger Expression Inventory-2. Using multinomial logistic regressions, the results showed that White participants and those individuals with higher levels of anger are more inclined to invest in equity. Alternatively, Women and individuals with higher levels of anxiety were found to be more risk averse. These findings are relevant to financial advisers as most of the predictive outcomes relate to risk which is vital in making investment decisions. While prior research has shown the relevance of personality traits on investment performance, the added dimension of gender and race adds practicality to the findings. It also highlights the necessity of including demographic variables when assessing personality traits. (shrink)

Individual differences have been neglected in decision-making research on heuristics and cognitive biases. Addressing that issue requires having reliable measures. The author first reviewed the research on the measurement of individual differences in cognitive biases. While reliable measures of a dozen biases are currently available, our review revealed that some measures require improvement and measures of other key biases are still lacking (e.g., confirmation bias). We then conducted empirical work showing that adjustments produced a significant improvement of some measures and (...) that confirmation bias can be reliably measured. Overall, our review and findings highlight that the measurement of individual differences in cognitive biases is still in its infancy. In particular, we suggest that contextualized (in addition to generic) measures need to be improved or developed. (shrink)

The author reviewed the research on the impact of cognitive biases on professionals’ decision-making in four occupational areas. Two main findings emerged. First, the literature reviewed shows that a dozen of cognitive biases has an impact on professionals’ decisions in these four areas, overconfidence being the most recurrent bias. Second, the level of evidence supporting the claim that cognitive biases impact professional decision-making differs across the areas covered. Research in finance relied primarily upon secondary data while research in medicine and (...) law relied mainly upon primary data from vignette studies. Two research gaps are highlighted. The first one is a potential lack of ecological validity of the findings from vignette studies, which are numerous. The second is the neglect of individual differences in cognitive biases, which might lead to the false idea that all professionals are susceptible to biases, to the same extent. To address that issue, we suggest that reliable, specific measures of cognitive biases need to be improved or developed. (shrink)

In this paper, we explore an under-investigated question concerning the class of formal models that aim at providing normative guidance. We call such models normative models. In particular, we examine the question of how normative models can successfully exert normative guidance. First, we highlight the absence of a discussion of this question – which is surprising given the extensive debate about the success conditions of descriptive models – and motivate its importance. Second, we introduce and discuss two potential accounts of (...) the success conditions of normative models. Our tentative conclusion is that the second account is more promising. (shrink)

Modeling risk in a prescriptively plausible way represents a major issue in decision theory. The benchmarking procedure, being based on the satisficing principle and providing a probabilistic interpretation of expected utility (EU) theory, is prescriptive. Because it is a target-based language, the benchmarking procedure can be applied naturally to finance. In finance, the centrality of risk is widely recognized, but the risk measures that are commonly used to assess risk are too poor as a decision making tool. In this paper (...) we propose a two-stage decision criterion of choice under risk that provides an application of benchmarking to finance through a risk measure. We will analyze some nonexpected utility theories, in particular lottery dependent utility, as potential frameworks for our criterion. (shrink)

Recent stories of corporate insiders avoiding losses and, in some cases, generating enormous personal profits as their companies crumbled have led investors to question the integrity of American business and the fairness of the United States stock markets. The SEC tries to ensure the fairness of the stock markets by making and enforcing laws against unfair practices such as insider trading. In the United States, when insiders trade stock based on non-public information, they have broken the law and betrayed the (...) trust that has been placed in them.This study used student subjects to test the relationship between the likelihood of trading based on insider information and subjective probabilities of deterrents and motivations for insider trading. Expected gain, guilt, cynicism, and fairness of laws were the determinants that had a significant relationship with the intent to trade based on insider information. This study also found support for prospect theory with regard to insider trading. The results indicate that subjects are more likely to trade based on insider information to avoid a loss than to achieve an abnormal gain. The study also finds evidence of social desirability response bias. (shrink)

Are risk preferences stable over time? To address this question we elicit risk preferences from the same pool of subjects at two different moments in time. To interpret the results, we use a Fechner stochastic choice model in which the revealed preference of individuals is governed by some underlying preference, together with a random error. We take cumulative prospect theory as the underlying preference model (Kahneman and Tversky, Econometrica 47:263–292, 1979; Tversky and Kahneman, Journal of Risk and Uncertainty 5:297–323, 1992). (...) We observe that the aggregate pattern of preferences is very similar in both sessions, and it matches the results reported in the literature. Most subjects are risk averse for gains, and risk seeking for losses. However, the subjects that jointly agree with the reflection effect of prospect theory are around 50%. The percentage of individuals that change their responses across sessions is quite high, 63%. Estimating the stochastic choice model we find that 72% of the subjects have an underlying preference which agrees with the reflection effect of prospect theory. The remaining 28% are mainly classified as risk averse for both gains and losses. The results reinforce the empirical validity of the reflection effect. Deviations from the reflection effect can be attributed to noise, as well as to the existence of a fraction of risk averse subjects. (shrink)

Many prescriptions offered in the literature for enhancing creativity and innovation in organizations raise ethical concerns, yet creativity researchers rarely discuss ethics. We identify four categories of behavior proffered as a means for fostering creativity that raise serious ethical issues: breaking rules and standard operating procedures; challenging authority and avoiding tradition; creating conflict, competition and stress; and taking risks. We discuss each category, briefly identifying research supporting these prescriptions for fostering creativity and then we delve into ethical issues associated with (...) engaging in the prescribed behavior. These four rubrics illustrate ethical issues that need to be incorporated into the creativity and innovation literature. Recommendations for how organizations can respond to the ethical issues are offered based on practices of exemplary organizations and theories of organizational ethics. A research agenda for empirically investigating the ethical impact these four categories of behavior have on organizations concludes the article. (shrink)

Many prescriptions offered in the literature for enhancing creativity and innovation in organizations raise ethical concerns, yet creativity researchers rarely discuss ethics. We identify four categories of behavior proffered as a means for fostering creativity that raise serious ethical issues: (1) breaking rules and standard operating procedures; (2) challenging authority and avoiding tradition; (3) creating conflict, competition and stress; and (4) taking risks. We discuss each category, briefly identifying research supporting these prescriptions for fostering creativity and then we delve into (...) ethical issues associated with engaging in the prescribed behavior. These four rubrics illustrate ethical issues that need to be incorporated into the creativity and innovation literature. Recommendations for how organizations can respond to the ethical issues are offered based on practices of exemplary organizations and theories of organizational ethics. A research agenda for empirically investigating the ethical impact these four categories of behavior have on organizations concludes the article. (shrink)

We present an experiment in which we add a common delay in a choice between two risky prospects. The results show that delay produces the same change in preferences as in the well-documented common ratio effect in risky lotteries. The added common delay acts as if the probabilities were divided by some common ratio. Moreover, we show that there is a strong magnitude effect, in the sense that the effect of delay depends on the magnitude of the outcome. The results (...) are consistent with the recently introduced probability time trade-off (PTT) model by Baucells and Heukamp. We present a parameterization of the model based on the experimental results, showing that the value function exhibits increasing relative risk aversion, the weighting function is s-shaped, and the intrinsic discount rate is decreasing. (shrink)

In comparing different risk elicitation methods under the assumptions of expected utility theory, previous studies have found significant differences in the elicited risk attitudes. This paper extends this line of research to consider cumulative prospect theory by comparing risk attitudes and probability weightings determined using two elicitation methods: the method by Tanaka et al. :557–571, 2010; TCN method) and the method by Wakker and Deneffe :1131–1150, 1996; WD method). We demonstrate that the two methods reveal significantly different mean values for (...) the measured risk attitudes. Participants are classified on average as moderately risk-averse using the TCN method, whereas the same individuals are classified as nearly risk-neutral using the WD method. Moreover, we find that on average, participants overweight low probabilities and underweight high probabilities to a greater extent with the WD method than with the TCN method. Therefore, the different elicitation methods, that both consider probability weighting, can lead to different measured values of risk attitude and probability weighting. (shrink)

This paper provides a general framework for analyzing self-confirming policies. We study self-confirming equilibria in recurrent decision problems with incomplete information about the true stochastic model. We characterize stationary monetary policies in a linear-quadratic setting.