### Abstract

Original language | English |
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Place of Publication | Frederiksberg |

Publisher | Department of Economics, Copenhagen Business School |

Number of pages | 67 |

Publication status | Published - 2010 |

Series | Working Paper / Department of Economics. Copenhagen Business School |
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Number | 5-2009 |

### Cite this

*Estimating Subjective Probabilities*. Frederiksberg: Department of Economics, Copenhagen Business School. Working Paper / Department of Economics. Copenhagen Business School, No. 5-2009

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**Estimating Subjective Probabilities.** / Andersen, Steffen; Fountain, John; Harrison, Glenn W.; Rutström, E. Elisabet.

Research output: Working paper › Research

TY - UNPB

T1 - Estimating Subjective Probabilities

AU - Andersen, Steffen

AU - Fountain, John

AU - Harrison, Glenn W.

AU - Rutström, E. Elisabet

PY - 2010

Y1 - 2010

N2 - Subjective probabilities play a role in many economic decisions. There is a large theoretical literature on the elicitation of subjective probabilities, and an equally large empirical literature. However, there is a gulf between the two. The theoretical literature proposes a range of procedures that can be used to recover subjective probabilities, but stresses the need to make strong auxiliary assumptions or “calibrating adjustments” to elicited reports in order to recover the latent probability. With some notable exceptions, the empirical literature seems intent on either making those strong assumptions or ignoring the need for calibration. We illustrate how one can jointly estimate risk attitudes and subjective probabilities using structural maximum likelihood methods. This allows the observer to make inferences about the latent subjective probability, calibrating for virtually any well-specified model of choice under uncertainty. We demonstrate our procedures with experiments in which we elicit subjective probabilities. We calibrate the estimates of subjective beliefs assuming that choices are made consistently with expected utility theory or rank-dependent utility theory. Inferred subjective probabilities are significantly different when calibrated according to either theory.

AB - Subjective probabilities play a role in many economic decisions. There is a large theoretical literature on the elicitation of subjective probabilities, and an equally large empirical literature. However, there is a gulf between the two. The theoretical literature proposes a range of procedures that can be used to recover subjective probabilities, but stresses the need to make strong auxiliary assumptions or “calibrating adjustments” to elicited reports in order to recover the latent probability. With some notable exceptions, the empirical literature seems intent on either making those strong assumptions or ignoring the need for calibration. We illustrate how one can jointly estimate risk attitudes and subjective probabilities using structural maximum likelihood methods. This allows the observer to make inferences about the latent subjective probability, calibrating for virtually any well-specified model of choice under uncertainty. We demonstrate our procedures with experiments in which we elicit subjective probabilities. We calibrate the estimates of subjective beliefs assuming that choices are made consistently with expected utility theory or rank-dependent utility theory. Inferred subjective probabilities are significantly different when calibrated according to either theory.

M3 - Working paper

BT - Estimating Subjective Probabilities

PB - Department of Economics, Copenhagen Business School

CY - Frederiksberg

ER -