EGO UTILITY,OVERCONFIDENCE, AND TASK CHOICE

This paper models behavior when a decision maker cares about and manages her self‐image. In addition to having preferences over material outcomes, the agent derives “ego utility” from positive views about her ability to do well in a skill‐sensitive, “ambitious,” task. Although she uses Bayes' rule to update beliefs, she tends to become overconfident regarding which task is appropriate for her. If tasks are equally informative about ability, her task choice is also overconfident. If the ambitious task is more informative about ability, she might initially display underconfidence in behavior, and, if she is disappointed by her performance, later become too ambitious. People with ego utility prefer to acquire free information in smaller pieces. Applications to employee motivation and other economic settings are discussed. (JEL: D83, D11)     

Cautious Expected Utility and the Certainty Effect

Many violations of the independence axiom of expected utility can be traced to subjects' attraction to risk‐free prospects. The key axiom in this paper, negative certainty independence ([Dillenberger, 2010]), formalizes this tendency. Our main result is a utility representation of all preferences over monetary lotteries that satisfy negative certainty independence together with basic rationality postulates. Such preferences can be represented as if the agent were unsure of how to evaluate a given lottery p; instead, she has in mind a set of possible utility functions over outcomes and displays a cautious behavior: she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one. The set of utilities is unique in a well defined sense. We show that our representation can also be derived from a “cautious” completion of an incomplete preference relation.     

Fair Production and Allocation of an Excludable Nonrival Good

We study fairness in economies with one private good and one partially excludable nonrival good. A social ordering function determines for each profile of preferences an ordering of all conceivable allocations. We propose the following Free Lunch Aversion condition: if the private good contributions of two agents consuming the same quantity of the nonrival good have opposite signs, reducing that gap improves social welfare. This condition, combined with the more standard requirements of Unanimous Indifference and Responsiveness, delivers a form of welfare egalitarianism in which an agent's welfare is measured by the quantity of the nonrival good that, consumed at no cost, would leave her indifferent to the bundle she is assigned.     

Precautionary Bidding in Auctions

We analyze bidding behavior in auctions when risk‐averse buyers bid for a good whose value is risky. We show that when the risk in the valuations increases, DARA bidders will reduce their bids by more than the appropriate increase in the risk premium. Ceteris paribus, buyers will be better off bidding for a more risky object in first price, second price, and English auctions with affiliated common (interdependent) values. This “precautionary bidding” effect arises because the expected marginal utility of income increases with risk, so buyers are reluctant to bid so highly. We also show that precautionary bidding behavior can make DARA bidders prefer bidding in a common values setting to bidding in a private values one when risk‐neutral or CARA bidders would be indifferent. Thus the potential for a “winner's curse” can be a blessing for rational DARA bidders.     

Changes in Aleut Concerns Following the Stakeholder-Driven Amchitka Independent Science Assessment

There is widespread agreement that stakeholders should be included in the problem‐formulation phase of addressing environment problems and, more recently, there have been attempts to include stakeholders in other phases of environmental research. However, there are few studies that evaluate the effects of including stakeholders in all phases of research aimed at solving environmental problems. Three underground nuclear blasts were detonated on Amchitka Island from 1965 to 1971. Considerable controversy developed when the Department of Energy (DOE) decided to “close” Amchitka. Concerns were voiced by subsistence Aleuts living in the region, resource trustees, and the State of Alaska, among others. This article evaluates perceptions of residents of three Aleutian village before (2003) and after (2005) the Consortium for Risk Evaluation with Stakeholder Participation's (CRESP) Amchitka Independent Science Assessment (AISA). The CRESP AISA provided technical information on radionuclide levels in biota to inform questions of seafood safety and food chain health. CRESP used the questions asked at public meetings in the Aleut communities of Atka, Nikolski, and Unalaska to evaluate attitudes and perceptions before and after the AISA. Major concerns before the AISA were credibility/trust of CRESP and the DOE, and information about biological methodology of the study. Following the AISA, people were most concerned about health effects and risk reduction, and trust issues with CRESP declined while those for the DOE remained stable. People’s relative concerns about radionuclides declined, while their concerns about mercury (not addressed in the AISA) increased, and interest in ecological issues (population changes of local species) and the future (continued biomonitoring) increased from 2003 to 2005. These results suggest that questions posed at public meetings can be used to evaluate changes in attitudes and perceptions following environmental research, and the results are consistent with the hypothesis that the AISA answered questions about radionuclides, and lowered overall concern about radionuclides, but left unanswered concerns about the health effects of mercury.     

Regression Versus Causation,Revisited

I recently discussed pitfalls in attempted causal inference based on reduced‐form regression models. I used as motivation a real‐world example from a paper by Dr. Sneeringer, which interpreted a reduced‐form regression analysis as implying the startling causal conclusion that “doubling of [livestock] production leads to a 7.4% increase in infant mortality.” This conclusion is based on: (A) fitting a reduced‐form regression model to aggregate (e.g., county‐level) data; and (B) (mis)interpreting a regression coefficient in this model as a causal coefficient, without performing any formal statistical tests for potential causation (such as conditional independence, Granger‐Sims, or path analysis tests). Dr. Sneeringer now adds comments that confirm and augment these deficiencies, while advocating methodological errors that, I believe, risk analysts should avoid if they want to reach logically sound, empirically valid, conclusions about cause and effect. She explains that, in addition to (A) and (B) above, she also performed other steps such as (C) manually selecting specific models and variables and (D) assuming (again, without testing) that hand‐picked surrogate variables are valid (e.g., that log‐transformed income is an adequate surrogate for poverty). In her view, these added steps imply that “critiques of A and B are not applicable” to her analysis and that therefore “a causal argument can be made” for “such a strong, robust correlation” as she believes her regression coefficient indicates. However, multiple wrongs do not create a right. Steps (C) and (D) exacerbate the problem of unjustified causal interpretation of regression coefficients, without rendering irrelevant the fact that (A) and (B) do not provide evidence of causality. This reply focuses on whether any statistical techniques can produce the silk purse of a valid causal inference from the sow's ear of a reduced‐form regression analysis of ecological data. We conclude that Dr. Sneeringer's analysis provides no valid indication that air pollution from livestock operations causes any increase in infant mortality rates. More generally, reduced‐form regression modeling of aggregate population data—no matter how it is augmented by fitting multiple models and hand‐selecting variables and transformations—is not adequate for valid causal inference about health effects caused by specific, but unmeasured, exposures.     

Other Aspects of BSE Issues in East Asian Countries

Scientific risk estimates of BSE can be the same internationally; however, socioeconomic backgrounds, such as food supply (e.g., beef import status) and dietary life, are different between East Asian countries (i.e., in this article, Japan, Korea, and Taiwan) and Western countries, which may account for differences in risk perception of people. Since political and social backgrounds also differ among these East Asian countries, they will also influence people's attitudes toward food safety. Psychological factors such as “dread” and the “unknown” are considered to be important in risk perception, but socioeconomic, and in some cases political, situations (e.g., attitudes of politicians and political pressures in trade) may strongly influence the perception and acceptance of various risks by citizens. With regard to the BSE issues, latter aspects may contribute a lot to risk perception, but have not been examined in depth until now. Although protection of health is the key element to food safety, sometimes business factors can overwhelm safety issues in international trade. Appropriate risk governance in food safety issues, such as BSE, can be attained not only through application of outputs of scientific assessment, but also through deliberation of various aspects, that may have strong influence on people's risk perception, and improved communication among stakeholders and also among countries.     

“Modest doubt is called the beacon of the wise”—Incorporating uncertainty in risk analysis from Shakespeare to today

“Modest doubt is call'd the beacon of the wise.”—William Shakespeare, Troilus and Cressida. Although the character Hector warns his fellow Trojans with this line not to engage in war against the Greeks, Shakespeare's works are replete with characters who do not incorporate modest doubt, or any consideration of uncertainty, in their risk decisions. Perhaps Shakespeare was simply a keen observer of human nature. Although risk science has developed tremendously over the last five decades (and scientific inquiry over five centuries), the human mind still frequently defaults to conviction about certain beliefs, absent sufficient scientific evidence—which has effects not just on individual lives, but on policy decisions that affect many. This perspective provides background on the Shakespearean quote in its literary and historical context. Then, as this quote is the theme of the 2023 Society for Risk Analysis Annual Meeting, we describe how “modest doubt”—incorporating the notion of uncertainty into risk analysis for individual and policy decisions—is still the “beacon of the wise” today.     

INDIVIDUAL RISK ATTITUDES: MEASUREMENT,DETERMINANTS, AND BEHAVIORAL CONSEQUENCES

This paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects' homes. Using a question asking people about their willingness to take risks “in general”, we find that gender, age, height, and parental background have an economically significant impact on willingness to take risks. The experiment confirms the behavioral validity of this measure, using paid lottery choices. Turning to other questions about risk attitudes in specific contexts, we find similar results on the determinants of risk attitudes, and also shed light on the deeper question of stability of risk attitudes across contexts. We conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks, occupational choice, and smoking. The question about risk taking in general generates the best all‐round predictor of risky behavior.     

Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion

Does individual behavior in a laboratory setting provide a reliable indicator of behavior in a naturally occurring setting? We consider this general methodological question in the context of eliciting risk attitudes. The controls that are typically employed in laboratory settings, such as the use of abstract lotteries, could lead subjects to employ behavioral rules that differ from the ones they employ in the field. Because it is field behavior that we are interested in understanding, those controls might be a confound in themselves if they result in differences in behavior. We find that the use of artificial monetary prizes provides a reliable measure of risk attitudes when the natural counterpart outcome has minimal uncertainty, but that it can provide an unreliable measure when the natural counterpart outcome has background risk. Behavior tended to be moderately risk averse when artificial monetary prizes were used or when there was minimal uncertainty in the natural nonmonetary outcome, but subjects drawn from the same population were much more risk averse when their attitudes were elicited using the natural nonmonetary outcome that had some background risk. These results are consistent with conventional expected utility theory for the effects of background risk on attitudes to risk.     

The Law of Demand and Risk Aversion

This note proposes a necessary and sufficient condition on a utility function to guarantee that it generates a demand function satisfying the law of demand. This condition can be interpreted in terms of an agent's attitude towards lotteries in commodity space. As an application, we show that when an agent has an expected utility function, her demand for securities satisfies the law of demand if her coefficient of relative risk aversion does not vary by more than 4.     

Incentive Contracts in Projects with Unforeseeable Uncertainty

Designing incentive contracts that constructively guide employee efforts is a particularly difficult challenge in novel innovation initiatives, where unforeseen events may occur. Empirical studies have observed a variety of incentive structures in innovation settings: “time and material contracts” (compensation for executing orders), “downside protection” (target‐driven incentives with protection from unexpected risks), and “upside rewards” (additional remuneration for pursuing opportunities). This paper develops a model of incentives in presence of unforeseen events and offers a theoretical prediction of which of the empirically observed incentive structures should be used under which circumstances. The combination of three key influences drives the shape of the best incentive contract. First, the presence of unforeseeable uncertainty, or the occurrence of events that cannot possibly be foreseen at the outset. These may force a change in the project's plan, making pure target setting insufficient. Second, fairness concerns dictate that the employee's expected compensation cannot be shifted downward by unforeseen events, because it would cause demotivation, hostility, and defection. Third, management may not be able to observe the detailed actions of the employee (moral hazard) nor whether a positive or negative unforeseen event has occurred (asymmetric information).     

具有公平感的零售商订购决策研究

供应链系统中,零售商的公平感知会对其订购决策产生影响。将公平感细分为四类：过程双边公平、结果双边公平、过程单边公平和结果单边公平,研究了具有不同公平感类型的零售商在批发价合同下的订购决策。第一,在批发价合同中,具有过程或结果双边公平感的零售商,其订购量各不相同,与不考虑公平感的零售商的相对大小关系取决于系统参数;并且,零售商的公平感无法协调系统,但在某些条件下,可以改善其在系统中的相对收益。第二,在批发价合同中,具有过程或结果单边公平感的零售商,若零售商关注过程单边公平,其订购量总小于不具有公平感的零售商的;若零售商关注结果单边公平,在某些条件下,其订购量大于不具有公平感的零售商的;并且,零售商的公平感无法协调系统,但在某些条件下,可以改善其在系统中的相对收益。     

RISK AVERSION AND EXPECTED UTILITY THEORY: AN EXPERIMENT WITH LARGE AND SMALL STAKES

We employ a novel data set to estimate a structural econometric model of the decisions under risk of players in a game show where lotteries present payoffs in excess of half a million dollars. The decisions under risk of players in the presence of large payoffs allow us to estimate the parameters of the curvature of the von Neumann–Morgenstern utility function—not only locally, as in previous studies in the literature, but also globally. Our estimates of relative risk aversion indicate that a constant relative risk aversion parameter of about 1 captures the average of the sample population. We also find that individuals are practically risk neutral at small stakes and risk averse at large stakes—a necessary condition, according to Rabin’s calibration theorem, for expected utility to provide a unified account of individuals’ attitudes toward risk. Finally, we show that for lotteries characterized by substantial stakes, nonexpected utility theories fit the data equally as well as expected utility theory.     

Beyond a Simple Case of Black and White: Searching for the White Male Effect in the African-American Community

Prior research focusing on risk perceptions has led to the observation that well‐educated and politically conservative white males tend to systematically perceive lower levels of risk from a wide range of hazards when compared to other members of society (e.g., white women, nonwhite women and men). While this “white male effect (WME)” is quite striking given that many policymakers fall into this group, a byproduct of this finding is that it deflects attention from the heterogeneity, in terms of people's concerns about risks, that exists in African‐American and other minority communities. The research reported here set out to explore this heterogeneity by asking a simple question: Can a phenomenon similar to the WME be found in the African‐American community? It can, and its implications for research and practice in risk management are discussed.     

The nature of action learning

Action Learning has developed to such an extent that there is now a demand to ‘know’ what it is. There is one way, and one way alone, of getting to ‘know’ what action learning is, and that is by doing it. For those who most clamour to ‘know’ what something might be are usually the victims of an educational system that leaves the vast majority who pass through it ignorant of the meaning of the verb to ‘know’ .... If, for example, I am asked “Do you know that woman?”, it is most probable that the questioner does not ‘know’ what he is asking me. Does he mean “Do I know her name? Or where she lives? Or am I able to introduce him to her? Or what she does for a living? Or do I recognise her by sight? Or have I been to bed with her? And, if so, what progress did I make?...” Thus, with action learning: “Have I read a book about it? Or attended a seminar at which somebody was trying to sell places on an action learning programme? Or visited a set of participants meeting as part of such a programme? Or tried to organise real persons tackling real problems in real time, and trying thereby to learn with and from each other? Or been an active participant myself in such a programme?...” To ‘know’ what action learning is, one must have been responsibly involved in it; since this cannot have been done merely by reading about action learning, it is impossible in this, or any other, note to convey more than the vaguest impression of what this educational approach may be. The day action learning becomes explicable in words alone will be the day to abandon the practice of it.     

Ellsberg Revisited: An Experimental Study

An extension to Ellsberg's experiment demonstrates that attitudes to ambiguity and compound objective lotteries are tightly associated. The sample is decomposed into three main groups: subjective expected utility subjects, who reduce compound objective lotteries and are ambiguity neutral, and two groups that exhibit different forms of association between preferences over compound lotteries and ambiguity, corresponding to alternative theoretical models that account for ambiguity averse or seeking behavior.     

Comparative Testing of Experts

We show that a simple “reputation‐style” test can always identify which of two experts is informed about the true distribution. The test presumes no prior knowledge of the true distribution, achieves any desired degree of precision in some fixed finite time, and does not use “counterfactual” predictions. Our analysis capitalizes on a result of Fudenberg and Levine (1992) on the rate of convergence of supermartingales. We use our setup to shed some light on the apparent paradox that a strategically motivated expert can ignorantly pass any test. We point out that this paradox arises because in the single‐expert setting, any mixed strategy for Nature over distributions is reducible to a pure strategy. This eliminates any meaningful sense in which Nature can randomize. Comparative testing reverses the impossibility result because the presence of an expert who knows the realized distribution eliminates the reducibility of Nature's compound lotteries.     

Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics

Gray markets, also known as parallel imports, have created fierce competition for manufacturers in many industries. We analyze the impact of parallel importation on a price‐setting manufacturer that serves two markets with uncertain demand, and characterize her policy against parallel importation. We show that ignoring demand uncertainty can take a significant toll on the manufacturer's profit, highlighting the value of making price and quantity decisions jointly. We find that adjusting prices is more effective in controlling gray market activity than reducing product availability, and that parallel importation forces the manufacturer to reduce her price gap while demand uncertainty forces her to lower prices. Furthermore, we explore the impact of market conditions (such as market base, price sensitivity, and demand uncertainty) and product characteristics (“fashion” vs. “commodity”) on the manufacturer's policy towards parallel importation. We also provide managerial insights about the value of strategic decision‐making by comparing the optimal policy to the uniform pricing policy that has been adopted by some companies to eliminate gray markets entirely. The comparison indicates that the value of making price and quantity decisions strategically is highest for moderately different market conditions and non‐commodity products.     

EPA Underestimates,Oversimplifies, Miscommunicates,and Mismanages Cancer Risks by Ignoring Human Susceptibility

If exposed to an identical concentration of a carcinogen, every human being would face a different level of risk, determined by his or her genetic, environmental, medical, and other uniquely individual characteristics. Various lines of evidence indicate that this susceptibility variable is distributed rather broadly in the human population, with perhaps a factor of 25‐ to 50‐fold between the center of this distribution and either of its tails, but cancer risk assessment at the EPA and elsewhere has always treated every (adult) human as identically susceptible. The National Academy of Sciences “Silver Book” concluded that EPA and the other agencies should fundamentally correct their mis‐computation of carcinogenic risk in two ways: (1) adjust individual risk estimates upward to provide information about the upper tail; and (2) adjust population risk estimates upward (by about sevenfold) to correct an underestimation due to a mathematical property of the interindividual distribution of human susceptibility, in which the susceptibility averaged over the entire (right‐skewed) population exceeds the median value for the typical human. In this issue of Risk Analysis, Kenneth Bogen disputes the second adjustment and endorses the first, though he also relegates the problem of underestimated individual risks to the realm of “equity concerns” that he says should have little if any bearing on risk management policy. In this article, I show why the basis for the population risk adjustment that the NAS recommended is correct—that current population cancer risk estimates, whether they are derived from animal bioassays or from human epidemiologic studies, likely provide estimates of the median with respect to human variation, which in turn must be an underestimate of the mean. If cancer risk estimates have larger “conservative” biases embedded in them, a premise I have disputed in many previous writings, such a defect would not excuse ignoring this additional bias in the direction of underestimation. I also demonstrate that sensible, legally appropriate, and ethical risk policy must not only inform the public when the tail of the individual risk distribution extends into the “high‐risk” range, but must alter benefit‐cost balancing to account for the need to try to reduce these tail risks preferentially.