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Decision Making and Trade without Probabilities
Source: www.oekonomi.uio.no
Topic: Decision Making
Sort Desciption: they know and knowledge of what they do not know in their decision making. Keywords: Decisions under uncertainty; non-expected utility; ...
Content Inside: Decision Making and Trade without Probabilities Jack Stecher Radhika Lunawat Kira Pronin John Dickhaut December 2006 Abstract What is a rational decision-maker supposed to do when facing an unfamiliar problem where there is uncertainty but no basis for making probabilistic assessments? One answer is to use a form of expected utility theory and assume that agents assign their own subjective probabilities to each element of the (presumably known) state space. In contrast this paper presents a model in which agents do not form subjective probabilities over the elements of the state space but nonetheless use new information to update their beliefs about what the elements of the state space are. This model is shown to lead to different predictions about trading behavior in a simple asset market under uncertainty. A controlled laboratory experiment tests the predictions of this model against those of expected utility theory and against the hypothesis that subjects act navely and non-strategically. The results suggest that a lack of subjective probabilities does Norwegian School of Economics and Business Administration. Email: jack.stecher@nhh.no University of Minnesota. Email: rlunawat@csom.umn.edu University of Bergen. Email: kira.pronin@student.uib.no University of Minnesota. Email: jdickhaut@csom.umn.edu. The authors wish to thank Geir Asheim Robert Bushman Monica Capra Jonathan Glover Jose Correia Guides John Hand John Hey Ashraf Jaffer Todd Kaplan Shimon Kogan Wayne Landsman Carolyn Levine Pierre Liang Fernando Machado Egil Matsen Charles Noussair Charlie Plott Robin Pope David Reiley Ricardo Reis Tom Rietz Tomomi Tanaka Joseph Wang the participants at the 2006 Economic Science Association meetings in Atlanta Nottingham and Tucson those at the FUR XII meetings in Rome those at the First Nordic Workshop on Behavioral and Experimental Economics in Oslo and workshop participants at Catholic University of Portugal Carnegie Mellon University an ...
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