Morality and welfare

The economic theory of utility does not take into account moral behaviour, that is behaviour in which an individual faced with two courses of action may choose the one which is less profitable to him. It is shown in this paper that the economic approach can be broadened to take such behaviour into account. The individual is considered to maximize a higher welfare function whose arguments are (a) his utility and (b) higher goods or moral value. The latter are goals which he ought to achieve. The amount of higher goods achieved depends upon his moral preference. The ranking of different acts is complete - an assumption commonly made in economics with regard to bundles of goods. In an extension of the economic model of optimization over time, the individual is considered to maximize his higher welfare over his lifetime. This may require raising his moral preference.     

The stochastic component in choice and regression to the mean

In this article, we illustrate experimentally an important consequence of the stochastic component in choice behaviour which has not been acknowledged so far. Namely, its potential to produce ‘regression to the mean’ (RTM) effects. We employ a novel approach to individual choice under risk, based on repeated multiple-lottery choices (i.e. choices among many lotteries), to show how the high degree of stochastic variability present in individual decisions can distort crucially certain results through RTM effects. We demonstrate the point in the context of a social comparison experiment.     

Stronger utility

Empirical research often requires a method how to convert a deterministic economic theory into an econometric model. A popular method is to add a random error term on the utility scale. This method, however, ignores stochastic dominance. A modification of this method is proposed to account for stochastic dominance. The modified model compares favorably to other existing models in terms of goodness of fit to experimental data. The modified model can rationalize the preference reversal phenomenon. An intuitive axiomatic characterization of the modified model is provided. Important microeconomic concept of risk aversion is well defined in the modified model.     

Stochastic Choice and Consistency in Decision Making Under Risk: An Experimental Study

This paper reports the results of an experiment designed to uncover the stochastic structure of individual preferences over lotteries. Unlike previous experiments, which have presented subjects with pair-wise choices between lotteries, our design allowed subjects to choose between two lotteries or (virtually) any convex combination of the two lotteries. We interpret the mixtures of lotteries chosen by subjects as a measure of the stochastic structure of choice. We test between two alternative interpretations of stochastic choice: the random utility interpretation and the deterministic preferences interpretation. The main findings of the experiment are that the typical subject prefers mixtures of lotteries rather than the extremes of a linear lottery choice set. The distribution of choices does not change between a first and second asking of the same question. We argue that this provides support for the deterministic preferences interpretation over the random utility interpretation of stochastic choice. As a subsidiary result, we find a small proportion of subjects make choices that violate transitivity, but the level of intransitive choice falls significantly over time.     

Spatial externalities and risk in interdependent security games

Individuals regularly invest in self-protection to reduce the risk of an adverse event. The effectiveness of self-protection often depends on the actions of other economic agents and can be modeled as a stochastic coordination game with multiple Pareto-ranked equilibria. We use lab experiments to analyze tacit coordination in stochastic games with two kinds of interdependencies in payoffs: “non-spatial” in which every agent’s action has an impact on the risk faced by every other agent, and “spatial” in which agents only impact the risk faced by their immediate neighbors. We also compare behavior in the stochastic games to deterministic versions of the same games. We find that coordination on the payoff-dominant equilibrium is significantly easier in the deterministic games than in the stochastic games and that spatial interdependencies lead to greater levels of coordination in the deterministic game but not in the stochastic game. The difficulty with coordination observed in the stochastic games has important implications for many real-world examples of interdependent security and also illustrates the importance of not relying on data from deterministic experiments to analyze behavior in settings with risk.     

Failures of the reduction principle in an Ellsberg-type problem

Segal (1987) suggested that the Ellsberg paradox might be explained in terms of individuals mentally representing the decision problem as a two-stage lottery which they evaluated according to a non-expected utility model. This paper describes an experiment involving an explicitly two-stage analogue to an Ellsberg-type problem. This design substantially reduces the frequency of classic Ellsberg behaviour, but reveals other systematic violations of conventional theory. The paper discusses the particular patterns of choice and raises the more general problem of modelling individual decisions when the reduction principle does not hold.     

A Microeconometric Test of Alternative Stochastic Theories of Risky Choice

The random preference, Fechner (or white noise), and constant error (or tremble) models of stochastic choice under risk are compared. Various combinations of these approaches are used with expected utility and rank-dependent theory. The resulting models are estimated in a random effects framework using experimental data from two samples of 46 subjects who each faced 90 pairwise choice problems. The best fitting model uses the random preference approach with a tremble mechanism, in conjunction with rank-dependent theory. As subjects gain experience, trembles become less frequent and there is less deviation from behaviour consistent with expected utility theory.     

The Psychology of Environmentally Sustainable Behavior: Fitting Together Pieces of the Puzzle

This paper considers the main features of four general psychological approaches to the analysis of environmentally sustainable behavior (rational–economic, social dilemmas, attitude–behavior models, and applied behavioral analysis), and focuses on the problems inherent in applying each approach to this issue. It also details the utility of a holistic Social–Ecological Framework that I believe is useful for analyzing environmentally sustainable behavior. This approach draws on concepts from ecological psychology such as Gibson's (1979) notion of "affordances," and shows how such a method can account for and help us understand the limitations of traditional psychological approaches to environmentally sustainable behavior, and provides a general guiding framework for the formulation of environmental policy decisions and intervention programs.     

A Case for Correction

Summary Current criticisms of the correctional approach to offendersare examined, viz. (a) that it is ineffective, (b) that it isoften unjust, (c) that it is deterministic and (d) that thereare other approaches to which these strictures do not apply.It is concluded that these arguments do not justify the abandonmentof correctional policies.     

A model of consumption-dependent temptation

The paper characterizes axiomatically a class of temptation-driven preferences. The key (but not the only) novelty of the paper is the idea that the alternative which tempts when an item x is consumed may not be the same as the alternative which tempts when another item y is consumed. For any single item to be ultimately consumed, the other items can be ranked by how much they tempt. An individual contemplates, as an alternative consumption, only the item that tempts most. The utility of a menu is then equal to the utility of the item that is consumed less a (psychological) cost of resisting temptation; this cost depends on both: the item to be consumed and the item that tempts. Unlike most of the existing literature, the axioms are imposed on deterministic menus, not on menus of lotteries.     

A Method for Eliciting Utilities and its Application to Collective Choice

Designing a mechanism that provides a direct incentive for an individual to report her utility function over several alternatives is a difficult task. A framework for such mechanism design is the following: an individual (a decision maker) is faced with an optimization problem (e.g., maximization of expected utility), and a mechanism designer observes the decision maker’s action. The mechanism does reveal the individual’s utility truthfully if the mechanism designer, having observed the decision maker’s action, infers the decision maker’s utilities over several alternatives. This paper studies an example of such a mechanism and discusses its application to the problem of optimal social choice. Under certain simplifying assumptions about individuals’ utility functions and about how voters choose their voting strategies, this mechanism selects the alternative that maximizes Harsanyi’s social utility function and is Pareto-efficient.     

Behavioral Probabilities

This article introduces the concept of behavioral probabilities, along with an econometric procedure for jointly estimating these probabilities as well as individual utility functions. Behavioral probabilities that guide decisions differ from posterior probabilities that are reported after receiving risk information. The underlying process that generates behavioral probabilities reflects a behavioral anomaly as the new risk information takes on an excessive role. While utility function estimates are consistent with theoretical predictions, considering behavioral probabilities alters their implications. Viscusi's research is supported by the Olin Center for Law, Business, and Economics.     

Is Context-Based Choice due to Context-Dependent Preferences?

The rationalization of context-based choice is usually based on the assumption that preferences are context-dependent. In this paper, we show that context-based choice can be due to the characteristics of the choice procedure applied by the individual and not to the dependence of preferences (stochastic or deterministic) on the context. Our arguments are illustrated focusing on the much-studied dominated-alternative effects.     

On Ordinal Utility,Cardinal Utility and Random Utility

Though the Random Utility Model (RUM) was conceived entirely in terms of ordinal utility, the apparatus through which it is widely practised exhibits properties of cardinal utility. The adoption of cardinal utility as a working operation of ordinal is perfectly valid, provided interpretations drawn from that operation remain faithful to ordinal utility. The article considers whether the latter requirement holds true for several measurements commonly derived from RUM. In particular it is found that measurements of consumer surplus change may depart from ordinal utility, and exploit the cardinality inherent in the practical apparatus.      

Choice and constraint in budget-making

A theory of the budgetary process within public resource allocation has to recognize that decision rules may vary over time and program. Our findings based on a new econometric approach indicate that various different decision mechanisms operate in different categories of public resource allocation. Variation over time is particularly difficult to accommodate within the incrementalist approach as incremental decision rules imply structural stability over time. We find the opposite to be true of the programs analysed.A model of the public expenditure process has to take choice into account to a larger extent. The attempt to make budget-making a function of constraints violates the occurrence of shiftpoints that is typical of the data. The existence of a base and the resort to mechanical rules for the derivation of the yearly increments implies a deterministic interpretation of budgetary behavior. Budgets are made in choice processes where the principal actors employ various decision rules meaning that budget-making is more voluntaristic than deterministic. The choice rules employed for the derivation of requests and appropriations are not mechanistic decision rules.     

Economics reasoning by econometrics or artificial intelligence

Currently, the mechanization of economic forecasting relies on econometric models with obvious limitations. Artificial Intelligence holds out several new possibilities. Will these innovations limit themselves to correcting existing defects, thereby improving the performance of established models, or will they bring about new approaches in modelling and in economic theory itself? Although this paper in no way pretends to answer this question, it will touch upon it as several avenues of research are outlined.     

An analysis of International Bulfer Stocks for cocoa and copper through dynamic optimization

Optimal control theory is used to analyze buffer stock price stabilisation. Linear econometric models of the world cocoa and copper markets are estimated over the period 1956-75 and the simulated to determine the “systematic” price for each commodity—the price when stochastic sources of market variation are suppressed. Stabilization at this price reduces the instability of producer revenue and also increases total revenue for both commodities. However, the buffer stocks are expensive. Net costs over the period 1966-76 are estimated at $1.7 billion for cocoa and $0.9 billion for copper.     

An experimental evaluation of the descriptive validity of lottery-dependent utility theory

This article compares the performance of the expected utility (EU) and lottery-dependent expected utility (LDEU) models in predicting the actual choices of experimental subjects among risky options. In the process, we present two approaches for calibrating the LDEU model for an individual decision maker. The results indicate that while LDEU exhibits a higher potential for correctly predicting choice, the version of the model calibrated by indifference judgments does not outperform EU. We suggest a functional form for the parametric functions that defines the LDEU model, and discuss ways in which this function can be incorporated into choice-based assessment approaches to improve predictions.This research was supported in part by the Business Associates Fund at the Fuqua School of Business, Duke University.