Estimating Subjective Probabilities

Steffen Andersen, John Fountain, Glenn W. Harrison, E. Elisabeth Rutström

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

Subjective probabilities play a central role in many economic decisions and act as an immediate confound of inferences about behavior, unless controlled for. Several procedures to recover subjective probabilities have been proposed, but in order to recover the correct latent probability one must either construct elicitation mechanisms that control for risk aversion, or construct elicitation mechanisms which undertake 'calibrating adjustments' to elicited reports. We illustrate how the joint estimation of risk attitudes and subjective probabilities can provide the calibration adjustments that theory calls for. We illustrate this approach using data from a controlled experiment with real monetary consequences to the subjects. This allows the observer to make inferences about the latent subjective probability, under virtually any well-specified model of choice under subjective risk, while still employing relatively simple elicitation mechanisms.
Subjective probabilities play a central role in many economic decisions and act as an immediate confound of inferences about behavior, unless controlled for. Several procedures to recover subjective probabilities have been proposed, but in order to recover the correct latent probability one must either construct elicitation mechanisms that control for risk aversion, or construct elicitation mechanisms which undertake 'calibrating adjustments' to elicited reports. We illustrate how the joint estimation of risk attitudes and subjective probabilities can provide the calibration adjustments that theory calls for. We illustrate this approach using data from a controlled experiment with real monetary consequences to the subjects. This allows the observer to make inferences about the latent subjective probability, under virtually any well-specified model of choice under subjective risk, while still employing relatively simple elicitation mechanisms.
LanguageEnglish
JournalJournal of Risk and Uncertainty
Volume48
Issue number3
Pages207-229
ISSN0895-5646
DOIs
StatePublished - 2014

Keywords

    Cite this

    Andersen, S., Fountain, J., Harrison, G. W., & Rutström, E. E. (2014). Estimating Subjective Probabilities. Journal of Risk and Uncertainty, 48(3), 207-229. DOI: 10.1007/s11166-014-9194-z
    Andersen, Steffen ; Fountain, John ; Harrison, Glenn W. ; Rutström, E. Elisabeth. / Estimating Subjective Probabilities. In: Journal of Risk and Uncertainty. 2014 ; Vol. 48, No. 3. pp. 207-229
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    Andersen, S, Fountain, J, Harrison, GW & Rutström, EE 2014, 'Estimating Subjective Probabilities' Journal of Risk and Uncertainty, vol. 48, no. 3, pp. 207-229. DOI: 10.1007/s11166-014-9194-z

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

    In: Journal of Risk and Uncertainty, Vol. 48, No. 3, 2014, p. 207-229.

    Research output: Contribution to journalJournal articleResearchpeer-review

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    AU - Fountain,John

    AU - Harrison,Glenn W.

    AU - Rutström,E. Elisabeth

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    AB - Subjective probabilities play a central role in many economic decisions and act as an immediate confound of inferences about behavior, unless controlled for. Several procedures to recover subjective probabilities have been proposed, but in order to recover the correct latent probability one must either construct elicitation mechanisms that control for risk aversion, or construct elicitation mechanisms which undertake 'calibrating adjustments' to elicited reports. We illustrate how the joint estimation of risk attitudes and subjective probabilities can provide the calibration adjustments that theory calls for. We illustrate this approach using data from a controlled experiment with real monetary consequences to the subjects. This allows the observer to make inferences about the latent subjective probability, under virtually any well-specified model of choice under subjective risk, while still employing relatively simple elicitation mechanisms.

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    Andersen S, Fountain J, Harrison GW, Rutström EE. Estimating Subjective Probabilities. Journal of Risk and Uncertainty. 2014;48(3):207-229. Available from, DOI: 10.1007/s11166-014-9194-z