Konstantinos Georgalos - Academia.edu (original) (raw)

Papers by Konstantinos Georgalos

Experimental economics, Jun 12, 2024

Theory and Decision

In this paper, we analyse higher-order risky choices by the representative cumulative prospect th... more In this paper, we analyse higher-order risky choices by the representative cumulative prospect theory (CPT) decision maker from three alternative reference points. These are the status quo, average payout and maxmin. The choice tasks we consider in our analysis include binary risks, and are the ones employed in the experimental literature on higher order risk preferences. We demonstrate that the choices made by the representative subject depend on the reference point. If the reference point is the status quo and the lottery choices exhibit symmetric risk, we demonstrate that there is no third order reflection effect of lottery choices but there is a fourth order reflection effect. When the average payout is the reference point, we demonstrate that any third or fourth order lottery choice is possible dependent upon the lottery payoffs. However, under the assumption of maxmin reference point, the risky choices are prudent and temperate. In addition to these results, our analysis revea...

Experimental Economics

It is now well established that higher-order risk preferences play a crucial role in determining ... more It is now well established that higher-order risk preferences play a crucial role in determining the risky choices of decision makers in a wide range of important areas such as economics, finance and health. While influential theories of risky choice in those fields can explain attitudes to second order risk, the implications of these models for higher order risk preferences is still to be developed. This paper addresses that gap for the Markowitz (J Political Econ, 60:151–58, 1952) (M) model of utility which embodies reference-dependent utility, loss aversion and was seemingly the first model to explain the fourfold attitude to risk. In this paper, we set out new properties of the M model for higher order preferences, such as higher-order risky choice reversals, that can help explain experimental evidence not readily reconcilable with other models of risky choice. A second contribution of the paper is to empirically examine the heterogeneity of preference functionals describing sec...

Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, p... more Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, preferences are represented by Expected Utility and prior beliefs are updated according to Bayes rule, upon the arrival of partial information. Nevertheless, when one considers non-neutral ambiguity attitudes, either the axiom of dynamic consistency or of consequentialism should be relaxed. We report the results of a new experiment, designed to investigate how people behave in a dynamic choice problem under ambiguity, where decisions are made both before and after the resolution of some uncertainty. We study which of the two rationality axioms people violate, along with the question of whether this violation is part of a conscious planning strategy or not. The combination of the two, allows us to classify subjects to three behavioural types: resolute, naA¯ve and sophisticated. Using data from a portfolio choice experiment where ambiguity is represented in a transparent and non-manipulable...

We run a laboratory experiment with a two-person game with unique pure Nash equilibrium which is ... more We run a laboratory experiment with a two-person game with unique pure Nash equilibrium which is also the solution of the iterative elimination of strictly dominated strategies. The subjects are asked to commit to a device that randomly picks one of three symmetric outcomes in this game (including the Nash equilibrium) with higher ex-ante expected payoff than the pure Nash equilibrium payoff. We find that the subjects do not accept this lottery (which is a coarse correlated equilibrium as in Moulin and Vial, 1978), instead, they choose to play the game and then coordinate on the pure Nash equilibrium. However, given an individual choice between a lottery with equal probabilities of the same outcomes and the sure payoff as in the Nash equilibrium, the lottery is chosen by the individuals. The result is robust against variations like (i) a lottery choice for a pair of individuals, (ii) different payoffs in the game and (iii) the fixed-match between pairs.

In a coarse correlated equilibrium (Moulin and Vial 1978), each player finds it optimal to commit... more In a coarse correlated equilibrium (Moulin and Vial 1978), each player finds it optimal to commit ex ante to the future outcome from a probabilistic correlation device instead of playing any strategy of their own. In this paper, we consider a specific two-person game with unique pure Nash and correlated equilbrium and test the concept of coarse correlated equilibrium with a device which is an equally weighted lottery over three symmetric outcomes in the game including the Nash equilibrium, with higher expected payoff than the Nash payoff (as in Moulin and Vial 1978). We also test an individual choice between a lottery over the same payoffs with equal probabilities and the sure payoff as in the Nash equilibrium of the game. Subjects choose the individual lottery, however, they do not commit to the device in the game and instead coordinate to play the Nash equilibrium. We explain this behaviour as an equilibrium in the game.

arXiv (Cornell University), Jul 31, 2023

Gallice and Monzón (2019) present a natural environment that sustains full cooperation in one-sho... more Gallice and Monzón (2019) present a natural environment that sustains full cooperation in one-shot social dilemmas among a finite number of self-interested agents. They demonstrate that in a sequential public goods game, where agents lack knowledge of their position in the sequence but can observe some predecessors' actions, full contribution emerges in equilibrium due to agents' incentive to induce potential successors to follow suit. In this study, we aim to test the theoretical predictions of this model through an economic experiment. We conducted three treatments, varying the amount of information about past actions that a subject can observe, as well as their positional awareness. Through rigorous structural econometric analysis, we found that approximately 25% of the subjects behaved in line with the theoretical predictions. However, we also observed the presence of alternative behavioural types among the remaining subjects. The majority were classified as conditional co-operators, showing a willingness to cooperate based on others' actions. Some subjects exhibited altruistic tendencies, while only a small minority engaged in free-riding behaviour.

Journal of Economic Behavior & Organization

Research Papers in Economics, Apr 3, 2020

This is the …rst paper to provide a comprehensive theoretical analysis of the third and fourth or... more This is the …rst paper to provide a comprehensive theoretical analysis of the third and fourth order lottery preferences implied by cumulative prospect theory (CPT). We consider the lottery choices from three alternative reference points: the status quo, the expected payout and the MaxMin. We report a large number of new results given the standard assumptions about probability weighting. We demonstrate, for example, the general result that from the status quo reference point there is no third order re ‡ection e¤ect but there is a fourth order re ‡ection e¤ect. When the average payout or the MaxMin is the reference point, we lose generality but can demonstrate that representative individuals with power value functions can make prudent or imprudent, temperate or intemperate choices depending on the precise magnitude of lottery payo¤s. In addition to this, we show that these representative CPT individuals can exhibit some surprising combinations of second with third and fourth order risk attitudes. Throughout the paper, we contrast our theoretical predictions with results reported in the literature and we are able to reconcile some con ‡icting evidence on higher order risk preferences.

Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, p... more Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, preferences are represented by Expected Utility and prior beliefs are updated according to Bayes rule, upon the arrival of partial information. Nevertheless, when one considers non-neutral ambiguity attitudes, either the axiom of dynamic consistency or of consequentialism should be relaxed. We report the results of a new experiment, designed to investigate how people behave in a dynamic choice problem under ambiguity, where decisions are made both before and after the resolution of some uncertainty. We study which of the two rationality axioms people violate, along with the question of whether this violation is part of a conscious planning strategy or not. The combination of the two, allows us to classify subjects to three behavioural types: resolute, naive and sophisticated. Using data from a portfolio choice experiment where ambiguity is represented in a transparent and non-manipulable ...

This is the first paper to provide a comprehensive theoretical analysis of the third and fourth o... more This is the first paper to provide a comprehensive theoretical analysis of the third and fourth order lottery preferences implied by cumulative prospect theory (CPT). We consider the lottery choices from three alternative reference points: the status quo, the expected payout and the MaxMin. We report a large number of new results given the standard assumptions about probability weighting. We demonstrate, for example, the general result that from the status quo reference point there is no third order reflection effect but there is a fourth order reflection effect. When the average payout or the MaxMin is the reference point, we lose generality but can demonstrate that representative individuals with power value functions can make prudent or imprudent, temperate or intemperate choices depending on the precise magnitude of lottery payoffs. In addition to this, we show that these representative CPT individuals can exhibit some surprising combinations of second with third and fourth orde...

SSRN Electronic Journal, 2021

This paper examines the higher order risk preferences of prudence and temperance for the Koszegi-... more This paper examines the higher order risk preferences of prudence and temperance for the Koszegi-Rabin (KR) expectations-based reference dependent model. Our analyses reveal that higher order risk attitudes exhibited by a KR decision maker in experimental research depend on whether risks are symmetric or asymmetric, and on whether prospects include small probability outcomes. We point to previous experimental evidence that is in line with the predictions in this paper. In addition, our findings can inform the design of future experimental research intended to identify competing models of decision making under risk.

Game Theory

This chapter discusses the way that three distinct fields, decision theory, game theory and compu... more This chapter discusses the way that three distinct fields, decision theory, game theory and computer science, can be successfully combined in order to optimally design economic experiments. Using an example of cooperative game theory (the Stag-Hunt game), the chapter presents how the introduction of ambiguous beliefs and attitudes towards ambiguity in the analysis can affect the predicted equilibrium. Based on agent-based simulation methods, the author is able to tackle similar theoretical problems and thus to design experiments in such a way that they will produce useful, unbiased and reliable data.

In a coarse correlated equilibrium (Moulin and Vial 1978), each player finds it optimal to commit... more In a coarse correlated equilibrium (Moulin and Vial 1978), each player finds it optimal to commit ex ante to the future outcome from a probabilistic correlation device instead of playing any strategy of their own. In this paper, we consider a specific two-person game with unique pure Nash and correlated equilibrium and test the concept of coarse correlated equilibrium with a device which is an equally weighted lottery over three symmetric outcomes in the game including the Nash equilibrium, with higher expected payoff than the Nash payoff (as in Moulin and Vial 1978). We also test an individual choice between a lottery over the same payoffs with equal probabilities and the sure payoff as in the Nash equilibrium of the game. Subjects choose the individual lottery, however, they do not commit to the device in the game and instead coordinate to play the Nash equilibrium. We explain this behaviour as an equilibrium in the game.

The first chapter presents an extended survey of the literature on dynamic decision making under ... more The first chapter presents an extended survey of the literature on dynamic decision making under ambiguity, focusing both on the theoretical modelling and the available empirical findings. The second chapter, experimentally investigates individual choice under ambiguity in a dynamic setting. Assuming that people have non-Expected Utility preferences, the study is aiming to understand how people update their prior beliefs in a sequential problem. Three different types of decision makers are identified: resolute, naive and sophisticated. In the third chapter, three alternative ways to model stochastic decision making when the choice variable is continuous are presented. These specifications are then tested with data collected from a tailor-made economic experiment.

A considerable amount of research has been devoted in an effort to identify the behavioural trait... more A considerable amount of research has been devoted in an effort to identify the behavioural traits that distinguish entrepreneurs from other people. A strand of the literature investigates the attitudes that entrepreneurs exhibit towards uncertainty, either objective (risk) or subjective (ambiguity). Indeed, the standard theory predicts that people, who are involved in entrepreneurial activities, tend to have distinct risk and ambiguity attitudes compared to those who engage in salary-paid employment. Nevertheless, the empirical evidence on this topic, based on field data, is mixed. Recently, methods from the experimental economics literature have been employed in order to shred light to this issue. This chapter provides an extensive review of the literature that experimentally studies the correlation between uncertainty attitudes and entrepreneurial decision making. The chapter concludes with a discussion of potential paths for further research.

Games and Economic Behavior

Experimental economics, Jun 12, 2024

Theory and Decision

Experimental Economics

arXiv (Cornell University), Jul 31, 2023

Journal of Economic Behavior & Organization

Research Papers in Economics, Apr 3, 2020

Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, p... more Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, preferences are represented by Expected Utility and prior beliefs are updated according to Bayes rule, upon the arrival of partial information. Nevertheless, when one considers non-neutral ambiguity attitudes, either the axiom of dynamic consistency or of consequentialism should be relaxed. We report the results of a new experiment, designed to investigate how people behave in a dynamic choice problem under ambiguity, where decisions are made both before and after the resolution of some uncertainty. We study which of the two rationality axioms people violate, along with the question of whether this violation is part of a conscious planning strategy or not. The combination of the two, allows us to classify subjects to three behavioural types: resolute, naive and sophisticated. Using data from a portfolio choice experiment where ambiguity is represented in a transparent and non-manipulable ...

SSRN Electronic Journal, 2021

Game Theory

In a coarse correlated equilibrium (Moulin and Vial 1978), each player finds it optimal to commit... more In a coarse correlated equilibrium (Moulin and Vial 1978), each player finds it optimal to commit ex ante to the future outcome from a probabilistic correlation device instead of playing any strategy of their own. In this paper, we consider a specific two-person game with unique pure Nash and correlated equilibrium and test the concept of coarse correlated equilibrium with a device which is an equally weighted lottery over three symmetric outcomes in the game including the Nash equilibrium, with higher expected payoff than the Nash payoff (as in Moulin and Vial 1978). We also test an individual choice between a lottery over the same payoffs with equal probabilities and the sure payoff as in the Nash equilibrium of the game. Subjects choose the individual lottery, however, they do not commit to the device in the game and instead coordinate to play the Nash equilibrium. We explain this behaviour as an equilibrium in the game.

Games and Economic Behavior