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Dual Criteria Decisions. Steffen Andersen Glenn Harrison Morten Lau Elisabet Rutstr ö m. Single Criteria Models of Decisions. Utility or expected utility EUT Multi-attribute models reduce to one scalar for each prospect - PowerPoint PPT Presentation
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Dual Criteria DecisionsDual Criteria Decisions
Steffen AndersenGlenn Harrison
Morten LauElisabet Rutström
Single Criteria Models of Decisions
Utility or expected utility
EUT Multi-attribute models reduce to one scalar for each prospect Non-EUT models such as rank-dependent EU or prospect
theory also boil down to a scalar
Some lexicographic models, but still single criteria at each sequential stage
Prospect theory with editing and then evaluation stage Similarity criteria, and then EU
Dual Criteria Models – Motivation
Mixtures of EU and PT
Could be interpreted as two criteria that the same decision-maker employs for a given choice
Psychological literature
Lopes SP/A model Heuristics and cues, emphasis on plural
Capital city cue? Natural language cue?
Lopes SP/A Model
Designed from observation of skewed bets The shape of the distribution of outcomes seemed to
matter Subjects had preferences for long-shots over symmetric
bets, with same EV Same as obscure arguments by Allais
Two criteria emerged from verbal protocols Security Potential (SP) criteria Aspiration (A) criteria
How are these combined? Weighted average, so ends up as a single criteria
model…
SP Criterion, Just RDEU
Decision weights Cumulative probabilities used to weight utility of
prospects Interpreted as “probability of at least $X”
Same as Quiggin, JEBO 1982 Special case may be RDEV, the “dual-risk” model of
Yaari Econometrica 1987 Used by Tversky & Kahneman in cumulative prospect
theory, JRU 1992
A Criterion, Just An Income Threshold
Weights given to outcome to reflect extent to which they achieve some subjective threshold Fuzzy sets Lopes & Oden, JMathPsych 1999 Some probability weight is all we need
0
.25
.5
.75
1
Prob
abili
ty
0 50000 100000 150000 200000 250000Prize Value
0
.25
.5
.75
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Prob
abili
ty
0 50000 100000 150000 200000 250000Prize Value
Alternative Aspiration Functions
Aside: Income Thresholds
NY city taxi drivers Tend to quit early on busy days, once they meet their
threshold; tend to work longer on slow days Shouldn’t they substitute labor time from slow days to
these busy days? Camerer, Babcock, Lowenstein & Thaler, QJE 1997;
thoroughly critiqued by Farber, JPE 2005 No controls for risk attitudes or discount rates… No controls for how many days worked…
Others with flexible work hours Stadium vendors (Oettinger, JPE 1999) Bicycle messengers (Fehr & Goette, AER 2007)
Deal Or No Deal
Natural experiment with large stakes Simple rules, nothing strategic Replicated from task to task
UK version Prizes from 1p up to ₤250,000 ($460k)
Average earnings ₤16,750 in our sample Divers demographics in sample
Limited demographics observable Some sample selection?
N=461
Skewed Distribution of Prizes
EV = ₤25,712 Median prizes = [₤750, ₤1,000]
Dynamic Sequence
Pick one box for yourself
Round #1 Open 5 boxes Get an offer ≈ 15% of EV of unopened prizes
Round #2, #3, #4, #5, #6 Open 3 boxes per round Offer ≈ 24%, 34%, 42%, 54%, 73% of EV
Round #7 Only 2 boxes left
Optimal Choices Under EUT
In round #1, compare U of certain offer to EU of virtual lottery from saying ND, D EU of virtual lottery from saying ND, ND, D EU of virtual lottery from saying ND, ND, ND, D EU of virtual lottery from saying ND, ND, ND, ND, D EU of virtual lottery from saying ND, ND, ND, ND, ND, D EU of just saying ND in every future round
Say ND if any EU exceeds U(offer) Similarly in round #2, etc. Likelihood of observed decision in each round
Prob(ND) = Φ[max (EU) - U(offer)]
Easy to extend to non-EUT models Close approximation of fully dynamic solution
See our Risk Aversion in Game Shows paper for details
Applying Various Models
EUT Expo-power with IRRA CRRA when allow for asset integration Subjects are not myopic
CPT Significant evidence of probability weighting No evidence of loss aversion
What is the true reference point??
See our Dynamic Choice Behavior in a Natural Experiment paper for details
The SP Criterion
Utility function CRRA: u(x) = x(1-r)/(1-r) for r≠1
Probability weighting ω(p) = pγ / [pγ + (1-p)γ]1/γ
Decision weights wi = ω(pi+…+pn) - ω(pi+1+…+pn) i=1,…,n-1
wn = ω(pn)
Overall RDEU or SP criterion RDUi = ∑ wi × u(xi)
The Aspiration Function
Pick some über-flexible cdf Monotone increasing Continuous
No real priors here
Cumulative non-central Beta distribution Three parameters Orrible to see written out in daylight
But an intrinsic function in Stata, GAUSS etc.
How To Combine SP and A?
Mixture modeling View SP as one psychological process View A as another psychological process Occurs within subject, for each choice
Illustrates why we are so agnostic on this in Weddings modeling
Likelihoods Likelihood of choice if using SP only Likelihood of choice if using A only Weighted, grand likelihood of SP/A
0
.25
.5
.75
1
ù(p)
0 .25 .5 .75 1
p
RDU ã=.55
0
.1
.2
.3
.4
.5
.6
.7
.8
.9
1
DecisionWeight
1 2 3 4 5
Prize (Worst to Best)
Figure 1: Decision Weights under RDU
0
.25
.5
.75
1
ù(p)
0 .25 .5 .75 1
p
RDU ã=.55
0
.1
.2
.3
.4
.5
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.7
.8
.9
1
DecisionWeight
1 2 3 4 5
Prize (Worst to Best)
Figure 1: Decision Weights under RDU
0
.25
.5
.75
1
ù(p)
0 .25 .5 .75 1
p
RDU ã=.55
0
.1
.2
.3
.4
.5
.6
.7
.8
.9
1
DecisionWeight
1 2 3 4 5
Prize (Worst to Best)
Figure 1: Decision Weights under RDU
0
.25
.5
.75
1
ù(p)
0 .25 .5 .75 1
p
SP Weighting Functionã=.664
0
.25
.5
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ç
0 50000 100000 150000 200000 250000
Prize Value
Aspiration WeightsFigure 2: SP/A Weighting and Aspiration Functions
Lab Experiments
Lab as complement to field More controls, such as the task design
Different country formats Different bank offer functions Information on earnings, especially the distribution
More information about subjects
Is the lab reliable?
See our Risk Aversion in Game Shows paper for details
Lab Design
UCF student subjects
N=125 in total, over several versions
Normal procedures Prizes presented in nominal game-show currency
Exchange rate converts to $250 maximum Subjects love playing this game
0
.25
.5
.75
1
ù(p)
0 .25 .5 .75 1p
SP Weighting Functionã=.308
0
.25
.5
.75
1
ç
0 50 100 150 200 250Prize Value
Aspiration Weights
Figure 7:SP/A Weighting and Aspiration Functions
With Lab Responses
Conclusions
Dual criteria models Way to integrate various criteria, including those with
descriptive and non-normative rationale Natural use of mixture modeling logic SP/A is also rank-dependent and sign-dependent Both criteria in SP/A seem to be used*
Deal Or No Deal Not just utility-weighting going on But there is some utility-weighting In comparable lab environment subjects seem to use a
very simple decision heuristic*