Dual Criteria Decisions

Steffen Andersen, Glenn W. Harrison, Morten Igel Lau, Elisabet E. Rutström

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

The most popular models of decision making use a single criterion to evaluate projects or lotteries. However, decision makers may actually consider multiple criteria when evaluating projects. We consider a dual criteria model from psychology. This model integrates the familiar tradeoffs between risk and utility that economists traditionally assume, allowance for rank-dependent decision weights, and consideration of income thresholds. We examine the issues involved in full maximum likelihood estimation of the model using observed choice data. We propose a general method for integrating the multiple criteria, using the logic of mixture models, which we believe is attractive from a decision-theoretic and statistical perspective. The model is applied to observed choices from a major natural experiment involving intrinsically dynamic choices over highly skewed outcomes. The evidence points to the clear role that income thresholds play in such decision making, but does not rule out a role for tradeoffs between risk and utility or probability weighting.
The most popular models of decision making use a single criterion to evaluate projects or lotteries. However, decision makers may actually consider multiple criteria when evaluating projects. We consider a dual criteria model from psychology. This model integrates the familiar tradeoffs between risk and utility that economists traditionally assume, allowance for rank-dependent decision weights, and consideration of income thresholds. We examine the issues involved in full maximum likelihood estimation of the model using observed choice data. We propose a general method for integrating the multiple criteria, using the logic of mixture models, which we believe is attractive from a decision-theoretic and statistical perspective. The model is applied to observed choices from a major natural experiment involving intrinsically dynamic choices over highly skewed outcomes. The evidence points to the clear role that income thresholds play in such decision making, but does not rule out a role for tradeoffs between risk and utility or probability weighting.
LanguageEnglish
JournalJournal of Economic Psychology
Volume41
Pages101-113
Number of pages13
ISSN0167-4870
DOIs
StatePublished - Apr 2014

Keywords

    Cite this

    Andersen, S., Harrison, G. W., Lau, M. I., & Rutström, . E. E. (2014). Dual Criteria Decisions. Journal of Economic Psychology, 41, 101-113. DOI: 10.1016/j.joep.2013.02.006
    Andersen, Steffen ; Harrison, Glenn W. ; Lau, Morten Igel ; Rutström, Elisabet E. . / Dual Criteria Decisions. In: Journal of Economic Psychology. 2014 ; Vol. 41. pp. 101-113
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    Andersen, S, Harrison, GW, Lau, MI & Rutström, EE 2014, 'Dual Criteria Decisions' Journal of Economic Psychology, vol. 41, pp. 101-113. DOI: 10.1016/j.joep.2013.02.006

    Dual Criteria Decisions. / Andersen, Steffen; Harrison, Glenn W. ; Lau, Morten Igel; Rutström, Elisabet E. .

    In: Journal of Economic Psychology, Vol. 41, 04.2014, p. 101-113.

    Research output: Contribution to journalJournal articleResearchpeer-review

    TY - JOUR

    T1 - Dual Criteria Decisions

    AU - Andersen,Steffen

    AU - Harrison,Glenn W.

    AU - Lau,Morten Igel

    AU - Rutström, Elisabet E.

    PY - 2014/4

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    N2 - The most popular models of decision making use a single criterion to evaluate projects or lotteries. However, decision makers may actually consider multiple criteria when evaluating projects. We consider a dual criteria model from psychology. This model integrates the familiar tradeoffs between risk and utility that economists traditionally assume, allowance for rank-dependent decision weights, and consideration of income thresholds. We examine the issues involved in full maximum likelihood estimation of the model using observed choice data. We propose a general method for integrating the multiple criteria, using the logic of mixture models, which we believe is attractive from a decision-theoretic and statistical perspective. The model is applied to observed choices from a major natural experiment involving intrinsically dynamic choices over highly skewed outcomes. The evidence points to the clear role that income thresholds play in such decision making, but does not rule out a role for tradeoffs between risk and utility or probability weighting.

    AB - The most popular models of decision making use a single criterion to evaluate projects or lotteries. However, decision makers may actually consider multiple criteria when evaluating projects. We consider a dual criteria model from psychology. This model integrates the familiar tradeoffs between risk and utility that economists traditionally assume, allowance for rank-dependent decision weights, and consideration of income thresholds. We examine the issues involved in full maximum likelihood estimation of the model using observed choice data. We propose a general method for integrating the multiple criteria, using the logic of mixture models, which we believe is attractive from a decision-theoretic and statistical perspective. The model is applied to observed choices from a major natural experiment involving intrinsically dynamic choices over highly skewed outcomes. The evidence points to the clear role that income thresholds play in such decision making, but does not rule out a role for tradeoffs between risk and utility or probability weighting.

    KW - Risk

    KW - Multiple criteria

    KW - Individual decision making

    KW - Natural experiment

    U2 - 10.1016/j.joep.2013.02.006

    DO - 10.1016/j.joep.2013.02.006

    M3 - Journal article

    VL - 41

    SP - 101

    EP - 113

    JO - Journal of Economic Psychology

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    Andersen S, Harrison GW, Lau MI, Rutström EE. Dual Criteria Decisions. Journal of Economic Psychology. 2014 Apr;41:101-113. Available from, DOI: 10.1016/j.joep.2013.02.006