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(with Larry Epstein)
Journal of the European Economic Association, accepted
Decisions under uncertainty are often made with information that is (ambiguous or) difficult to interpret because multiple interpretations are possible. For example, during the COVID-19 pandemic, policy-makers based their decisions on the fatality rate among tested and confirmed individuals, which is only an ambiguous signal of the overall fatality rate among the infected in the population -- a key unknown. Individuals may perceive and handle uncertainty about interpretation differently and in ways that are not directly observable to a modeler. This paper identifies and experimentally examines behavior that can be interpreted as reflecting an individual's attitude towards such uncertainty.
(with Guy Mayraz)
Review of Economics and Statistics, accepted
The revealed preference methodology allows an observer to infer preferences from choices. This paper extends this fundamental idea by experimentally identifying the preference for basing choices on simple decision rules. Subjects not only make case-by-case portfolio allocations but also design a simple investment rule for selecting portfolios. They then choose between these two decision modes for an additional set of problems. The majority opt for the rule interface, and in most cases, choose a simple investment rule that cannot be rationalized by any simple utility function or accounted for by reductions in decision time or cognitive costs.
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(with Emre Ozdenoren)
Economic Theory (2022), 74, 373-395
This paper introduces a theoretical model of decision making in which preferences are defined on both Savage subjective acts and compound objective lotteries. Preferences are two-stage probabilistically sophisticated when the ranking of acts corresponds to the ranking of the respective compound lotteries induced by the acts through the decision maker's subjective belief. This family of preferences includes various theoretical models proposed in the literature to accommodate non-neutral attitude towards ambiguity. The principle of calibration relates preferences over acts and compound objective lotteries, and provides a foundation for the tight empirical association between probabilistic sophistication and reduction of compound lotteries for all two-stage probabilistically sophisticated preferences.
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(with Aurelien Baillon and Chen Li)
Econometrica (2022), 90 (3), 1085-1107
Facing several decisions, people may consider each one in isolation or integrate them into a single optimization problem. Isolation and integration may yield different choices, for instance, if uncertainty is involved, and only one randomly selected decision is implemented. We investigate whether the random incentive system in experiments that measure ambiguity aversion provides a hedge against ambiguity, making ambiguity-averse subjects who integrate behave as if they were ambiguity neutral. Our results suggest that about half of the ambiguity averse subjects integrated their choices in the experiment into a single problem, whereas the other half isolated. Our design further enable us to disentangle properties of the integrating subjects' preferences over compound objects induced by the random incentive system and the choice problems in the experiment.
[go to paper] [Online version on Econometrica web site including supplemental material]
(with Aurelien Baillon and Chen Li)
Experimental Economics (2022), 25, 1002-1023
We demonstrate how the standard usage of the random incentive system in ambiguity experiments eliciting certainty and probability equivalents might not be incentive compatible if the decision maker is ambiguity averse. We propose a slight modification of the procedure in which the randomization takes place before decisions are made and the state is realized and prove that if subjects evaluate the experimental environment in that way (first - risk, second - uncertainty), incentive compatibility may be restored.
(with Anujit Chakraborty and Kota Saito)
American Economic Review: Insights (2020), 2 (1) 1-16
The paper establishes a tight relation between non-standard behaviors in the domains of risk and time, by considering a decision maker with non-expected utility preferences who believes that only present consumption is certain while any future consumption is uncertain. We provide the first complete characterizations of the two-way relations between the certainty effect and present-bias, and between the common-ratio effect and temporal reversals.
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(with Larry G. Epstein)
Review of Economic Studies (2019), 86 (2), 668-693
Many decisions are made in environments where outcomes are determined by the realization of multiple random events. A decision maker may be uncertain how these events are related. We identify and experimentally substantiate behavior that intuitively reflects a lack of confidence in their joint distribution. Our findings suggest a dimension of ambiguity which is different from that in the classical distinction between risk and "Knightian uncertainty."
(with David Freeman and Terri Kneeland)
Quantitative Economics (2019), 10 (1), 217-237
We study the effect of embedding pairwise choices between lotteries within a choice list on measured risk attitude. Using an experiment with online workers, we find that subjects choose the risky lottery rather than a sure payment significantly more often when responding to a choice list. This behavior can be rationalized by the interaction between non-expected utility and the random incentive system, as suggested by Karni and Safra (1987).
(with Dotan Persitz and Lanny Zrill)
Journal of Political Economy (2018), 126 (4), 1558-1593
Revealed preference theory is brought to bear on the problem of recovering approximate parametric preferences from consistent and inconsistent consumer choices. We propose measures of the incompatibility between the revealed preference ranking implied by choices and the ranking induced by the considered parametric preferences. These incompatibility measures are proven to characterize well-known inconsistency indices. We advocate a recovery approach that is based on such incompatibility measures, and demonstrate its applicability for misspecfication measurement and model selection. Using an innovative experimental design we empirically substantiate that the proposed revealed-preference-based method predicts choices significantly better than a standard distance-based method.
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[Open source Matlab toolkit for revealed preference analysis developed based on the code used in this paper]
(with Dotan Persitz and Lanny Zrill)
Journal of Economic Behavior and Organization (2017), 137, 105-112
Choices from linear budget sets are often used to recover consumer's preferences. The classic method uses revealed preference theory to construct non-parametric bounds on the indifference curve that passes through a given bundle. We show that these bounds do not apply to non-convex preferences, and therefore may lead to erroneous prediction and welfare analysis. We suggest an alternative that is based on the assumption of monotonicity of preferences.
(with Anujit Chakraborty, Evan M. Calford, Guidon Fenig)
Experimental Economics (2017), 20 (3), 687-706
We evaluate data on choices made from Convex Time Budgets (CTB) in Andreoni and Sprenger (2012a) and Augenblick et al (2015), two influential studies that proposed and applied this experimental technique. We use the Weak Axiom of Revealed Preference (WARP) to test for external consistency relative to pairwise choice, and demand, wealth and impatience monotonicity to test for internal consistency. We find that choices made by subjects in the original Andreoni and Sprenger (2012a) paper violate WARP frequently; violations of all three internal measures of monotonicity are concentrated in subjects who take advantage of the novel feature of CTB by making interior choices. Wealth monotonicity violations are more prevalent and pronounced than either demand or impatience monotonicity violations. We substantiate the importance of our desiderata of choice consistency in examining effort allocation choices made in Augenblick et al (2015), where we find considerably more demand monotonicity violations, as well as many classical monotonicity violations which are associated with time inconsistent behavior. We believe that the frequency and magnitude of WARP and monotonicity violations found in the two studies pose important confounds for interpreting and structurally estimating choice patterns elicited through CTB. We encourage researchers employing CTB in present and future experiments to include consistency tests in their design and pre-estimation analysis.
Econometrica (2015), 83 (1), 335-352
A sequence of experiments documents static and dynamic "preference reversals" between sooner-smaller and later-larger rewards, when the sooner reward could be immediate. The theoretically-motivated design permits separate identification of time-consistent, stationary and time-invariant choices. At least half of the subjects are time consistent, but only three-quarters of them exhibit stationary choices. About half of subjects with time inconsistent choices have stationary preferences. These results challenge the view that present-bias preferences are the main source of time inconsistent choices.
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American Economic Review (2008), 98 (3), 1145-1162
Decision makers tend to exhibit a higher degree of impatience when considering a delay to an immediate reward than when contemplating an identical delay to an equal future reward. This work argues that diminishing impatience originates from the distinction between the certain present and the risky future. A simple functional representation of preferences, exhibiting time inconsistency when the future is uncertain, is derived. Experimental evidence, which is inconsistent with other formulations that account for diminishing impatience, supports the proposed approach. The new theory uncovers a tight relation between diminishing impatience and well-known behavioral regularities in choice under risk and uncertainty.
Econometrica (2007), 75 (2), 503-536
An extension to Ellsberg's experiment demonstrates that attitudes to ambiguity and compound objective lotteries are tightly associated. The sample is decomposed into three main groups: subjective expected utility subjects, who reduce compound objective lotteries and are ambiguity neutral, and two groups that exhibit different forms of association between preferences over compound lotteries and ambiguity, corresponding to alternative theoretical models that account for ambiguity averse or seeking behavior.
(with Vincent Feltkamp)
Review of Economic Studies (2005), Vol. 72 (2), 449-466
The Ellsberg paradox demonstrates that people's beliefs over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of several positively correlated problems, she will be uncertainty averse. We generalize this argument and derive sufficient conditions for uncertainty aversion.
Games and Economic Behavior (2004) Vol. 46 (1), 189-198
It is shown that interim dynamically consistent trade may be supported among agents who have resolute (non-consequential) choice preferences.
(with Joram Mayshar)
Journal of Labor Economics (1997), Vol. 15 (1 pt 2), S198-S222
We analyze the organization of employment in nonsimultaneous shifts, considering the shift composition of manufacturing employment, both in the business cycle frequency and in the long run. With regard to the short run, we argue that shiftwork would be procyclical and that this, combined with the inherent lumpiness of shifts, may help resolve the puzzle of the procyclicality of labor productivity. With regard to the long run, we identify channels that may account for the increase in shiftwork in the past half-century and for the nonnegative cross-country correlation between shiftwork and the level of income.
(with Guidon Fenig and Giovanni Gallipoli)
This paper develops an experimental methodology that allows the identification of decision-making processes in interactive settings using tracking of non-choice data. This non-intrusive and indirect approach provides essential information for the characterization of beliefs. The analysis reveals significant heterogeneity, which is reduced to two broad types, differentiated by the importance of pecuniary rewards in agents’ payoff function. Most subjects maximize monetary rewards by best responding to beliefs. Others are able to identify these actions, but choose to systematically deviate from them -- exhibiting either altruistic or competitive motives.
(with Johannes Hoelzemann and Terri Kneeland)
In the canonical model of bounded rationality each player best-responds to their belief that other players reason to some finite level. We propose a novel behavior that reflects the player’s belief that while other players may be rational, the player cannot model and hence predict the behavior of others. This encompasses a situation where a player believes that their opponent can reason to a higher level than they do. We propose an identification strategy for such behavior, and evaluate it experimentally.
(with Michael Peters)
If preferences and beliefs are appropriately parametrized, different theories of "other-regarding'' preferences possess equilibria that are consistent with experimental results in a variety of setting. Our goal is to experimentally separate between those theories, by studying their comparative-static performance in the neighborhood of the classic Ultimatum Game, whose results are extremely robust. In order to perform this exercise, we first characterize monotone Perfect Bayesian Equilibia in the Ultimatum Game if preferences are interdependent. We then show that in this model, setting a lower bound to the offer a proposer can make, may decrease the proposer's offer and increase the responder's acceptance probability. Outcome-based theories and intentions-based models have (weakly) opposite predictions. We then design and execute an experiment that facilitates almost instantaneous learning and convergence by both proposers and responders. The experimental results are consistent with the predictions of the interdependent-preferences model.
This note discusses whether cash payments (as used in Halevy, 2015) are appropriate to elicit time preferences.
A decision maker with time consistent preferences may exhibit diminishing impatience, when uncertain lifetime is accounted for. Uncertain lifetime captures not only the risk of mortality, but also the possibility that a promise for a delayed reward might be breached, or a postponed consumption might not be realized. The restrictions that time consistency imposes on additive intertemporal preferences are characterized. It is shown that if the hazard rate of mortality is diminishing, then a time consistent agent will exhibit diminishing impatience. A demographic model that allows for unobservable heterogeneity in frailty (risk of mortality) accommodates diminishing impatience, even in the presence of stationarity and time consistency.
WORK IN PROGRESS
(with Guidon Fenig and Giovanni Gallipoli)
(with David Walker-Jones and Lanny Zrill)