A dynamic Ellsberg urn experiment (original) (raw)

Testing dynamic consistency and consequentialism under ambiguity

European Economic Review, 2021

Accounting for ambiguity aversion in dynamic decisions generally implies that either dynamic consistency or consequentialism must be given up. To gain insight into which of these principles better describes people's preferences, we tested them using a variation of Ellsberg's three-color urn experiment. Subjects were asked to make a choice both before and after they received a signal. We found that most ambiguity neutral subjects satisfied both dynamic consistency and consequentialism and behaved consistent with subjective expected utility with Bayesian updating. The majority of ambiguity averse subjects satisfied consequentialism, but violated dynamic consistency.

Individual Dynamic Choice Behaviour and the Common Consequence Effect

2017

What should you do when confronting a sequence of decisions such that you make some choices and chance makes some others, i.e., a dynamic decision making problem under risk? Standard economic rationality requires you to look at the final choices, determine the preferred options, choose the sequence of decisions that lead to those and follow that sequence through to the end. That behaviour is implied by the conjunction of the principles of separability, dynamic consistency and reduction of compound lotteries. Experimental research on these dynamic choice principles has been developed within the common ratio effect theoretical framework. This paper experimentally investigates what subjects do when confronting such a problem within a new theoretical framework provided by the common consequence effect that manipulates the value of the foregone-consequence in the prior risks.Results suggest that reduction of compound lotteries holds throughout, whilst dynamic consistency and separability...

Atemporal non-expected utility preferences, dynamic consistency and consequentialism

2010

This note studies conditions which allow to maintain a non-expected utility representation (Max-min expected utility and Choquet expected utility), dynamic consistency and consequentialism in an atemporal and purely subjective framework. By contrast with a dynamic set-up, where consistency can be reached with non-expected utility models, we show that both Maxmin expected utility and Choquet expected utility degenerate into an expected

Ambiguity Aversion, Games Against Nature, and Dynamic Consistency

Several papers, adopting an axiomatic approach to study decision making under ambiguity aversion, have produced con ‡icting predictions about how decision makers would behave in simple dynamic urn problems. We explore the concepts of ambiguity aversion and dynamic consistency, with examples of dynamic games against nature. Basically, a malevolent nature puts balls into the urn, and a fair nature draws them out. Depending on the game, various choices that seem inconsistent with static notions of ambiguity aversion or dynamic consistency are consistent with subgame perfection. In the dynamic 3-color Ellsberg urn problem with 30 red balls and 60 blue or green balls, the decision maker could strictly prefer to bet on blue-green at time 0, and to switch to red-green after learning that the ball is not green.

DECISION VERSUS POLICY: AN EXPECTED UTILITY RESOLUTION OF THE ELLSBERG PARADOX

An expected utility maximizer who wishes to establish a choice policy (rather than merely make a single choice) in an Ellsberg urn scenario will have reason to distinguish between urns whose contents are more or less ambiguous. Specifically, risk averters will avoid ambiguity and risk seekers will prefer ambiguity. A resolution of Ellsberg's paradox is thereby provided, in which ambiguity aversion/seeking is "rational", but the normative status of expected utility remains unassailed.

Measuring Hypothetical Bias in Choice Experiments: The Importance of Cognitive Consistency

The B.E. Journal of Economic Analysis & Policy, 2008

A choice experiment eliciting environmental values with both real and hypothetical tradeoffs is set up in order to test for hypothetical bias. A larger hypothetical bias was found in a between-subject than in a within-subject design, using otherwise identical scenarios, which can explain previous diverging results in the literature. We argue that people strive for consistency between their attitudes and behaviors, leading them to act in ways that correspond with their prior hypothetical statements. People hence seem to prefer to do what they say they would do, although this may not always reflect their true preferences regarding the good being valued.

Dynamic choice behavior in a natural experiment

University of Central …, 2006

We examine dynamic choice behavior in a natural experiment with large stakes and a demographically divers sample. The television game show Deal Or No Deal offers a rich paradigm to examine the latent decision processes that people use to make choices under uncertainty when they face future options linked to current choices. We have four major findings. First, we show that popular utility functions that assume constant relative or absolute risk aversion and expected utility theory defined over the prizes cannot characterize these choices, which exhibit increasing relative risk aversion over prizes ranging from a penny to nearly half a million U.S. dollars. Second, the argument of the utility function under expected utility theory reflects the integration of game show prizes with regular income. These decision makers do not segregate the income from the lotteries they face on the game show from the income that they bring to the game show. Allowing for this integration of income and game show prizes leads to choice behavior consistent with constant relative risk aversion. Third, we examine the effects of allowing contestants to make choices characterized by non-standard decision models. We find evidence of some probability weighting, but no loss aversion. We also find evidence that contestants make decisions as if using more than one latent criteria, mixing traditional utility evaluations, probability weighting, and aspiration levels. Fourth, we design and implement laboratory experiments patterned after the natural experiment, to gauge how qualitatively reliable the lab inferences are in the same type of dynamic choice task. We find that choices in the lab are dramatically different in one respectsubjects in those tasks do segregate the income from their prizes from their extra-lab income, in contrast to game show contestants who integrate the two.

Consistent dynamic choice and non-expected utility preferences

This paper studies the application of the two most popular non-expected utility (NEU) models -Choquet Expected Utility (CEU) and Maximin Expected Utility (CEU)- to dynamic choice situations in a purely subjective framework. We give an appropriate version of the reduction of compound acts axiom, that states the equivalence between a static and a dynamic choice situation. We show that if consequentialism -only those consequences that can be reached do matter- is additionally assumed, then a monotonic constant linear representation degenerate into expected utility. We envisage two different ways to resolve this problem for the cases where the representation is a CEU or a MEU one. One way consists to weaken the reduction of compound acts axiom, which does not hold on all events. Another way is to relax consequentialism. Then we axiomatically characterize an updating rule for both approaches allowing recursion in several cases.