Indecisiveness aversion and preference for commitment

We present an axiomatic model of preferences over menus that is motivated by three assumptions. First, the decision maker is uncertain ex ante (i.e., at the time of choosing a menu) about her ex post (i.e., at the time of choosing an option within her chosen menu) preferences over options, and she anticipates that this subjective uncertainty will not resolve before the ex post stage. Second, she is averse to ex post indecisiveness (i.e., to having to choose between options that she cannot rank with certainty). Third, when evaluating a menu she discards options that are dominated (i.e., inferior to another option whatever her ex post preferences may be) and restricts attention to the undominated ones. Under these assumptions, the decision maker has a preference for commitment in the sense of preferring menus with fewer undominated alternatives. We derive a representation in which the decision maker’s uncertainty about her ex post preferences is captured by means of a subjective state space, which in turn determines which options are undominated in a given menu, and in which the decision maker fears, whenever indecisive, to choose an option that will turn out to be the worst (undominated) one according to the realization of her ex post preferences.     

Valuing a homeland security policy: Countermeasures for the threats from shoulder mounted missiles

This paper reports estimates for the ex ante tradeoffs for three specific homeland security policies that all address a terrorist attack on commercial aircraft with shoulder mounted missiles. Our analysis focuses on the willingness to pay for anti-missile laser jamming countermeasures mounted on commercial aircraft compared with two other policies as well as the prospect of remaining with the status quo. Our findings are based a stated preference conjoint survey conducted in 2006 and administered to a sample from Knowledge Networks’ national internet panel. The estimates range from $100 to $220 annually per household. Von Winterfeldt and O’Sullivan’s (2006) analysis of the same laser jamming plan suggests that the countermeasures would be preferred if economic losses are above $74 billion, the probability of attack is larger than 0.37 in 10 years, and if the cost of the measures is less than about $14 billion. Our results imply that, using the most conservative of our estimates, a program with a cost consistent with their thresholds would yield significant aggregate net benefits.

A “Pseudo-endowment” effect,and its implications for some recent nonexpected utility models

This article describes a modification of the Allais paradox that induces preferences inconsistent with two conditions weaker than the independence axiom, namely quasi-convexity (a special case of which is the betweenness axom), and Hypothesis II of Machina (also called fanning-out). These violations can be formally derived from prospect theory by invoking a nonliner transformation of probability into decision weight.I would like to thank David Bell, Vijay Krishna, John Pratt, and especially Colin Camerer for helpful comments and criticism.     

A tractable method to measure utility and loss aversion under prospect theory

This paper provides an efficient method to measure utility under prospect theory. Our method minimizes both the number of elicitations required to measure utility and the cognitive burden for subjects, being based on the elicitation of certainty equivalents for two-outcome prospects. We applied our method in an experiment and were able to replicate the main findings on prospect theory, suggesting that our method measures what it is intended to. Our data confirmed empirically that risk seeking and concave utility can coincide under prospect theory. Utility did not depend on the probability used in the elicitation, which offers support for the validity of prospect theory.

The Value of a Probability Forecast from Portfolio Theory

A probability forecast scored ex post using a probability scoring rule (e.g. Brier) is analogous to a risky financial security. With only superficial adaptation, the same economic logic by which securities are valued ex ante – in particular, portfolio theory and the capital asset pricing model (CAPM) – applies to the valuation of probability forecasts. Each available forecast of a given event is valued relative to each other and to the “market” (all available forecasts). A forecast is seen to be more valuable the higher its expected score and the lower the covariance of its score with the market aggregate score. Forecasts that score highly in trials when others do poorly are appreciated more than those with equal success in “easy” trials where most forecasts score well. The CAPM defines economically rational (equilibrium) forecast prices at which forecasters can trade shares in each other’s ex post score – or associated monetary payoff – thereby balancing forecast risk against return and ultimately forming optimally hedged portfolios. Hedging this way offers risk averse forecasters an “honest” alternative to the ruse of reporting conservative probability assessments.     

Subjective Probability Weighting and the Discovered Preference Hypothesis

Numerous studies have convincingly shown that prospect theory can better describe risky choice behavior than the classical expected utility model because it makes the plausible assumption that risk aversion is driven not only by the degree of sensitivity toward outcomes, but also by the degree of sensitivity toward probabilities. This article presents the results of an experiment aimed at testing whether agents become more sensitive toward probabilities over time when they repeatedly face similar decisions, receive feedback on the consequences of their decisions, and are given ample incentives to reflect on their decisions, as predicted by Plott’s Discovered Preference Hypothesis (DPH). The results of a laboratory experiment with N = 62 participants support this hypothesis. The elicited subjective probability weighting function converges significantly toward linearity when respondents are asked to make repeated choices and are given direct feedback after each choice. Such convergence to linearity is absent in an experimental treatment where respondents are asked to make repeated choices but do not experience the resolution of risk directly after each choice, as predicted by the DPH. I thank Peter P. Wakker for useful comments and suggestions.     

Why a Simple Second-Price Auction Induces Efficient Endogenous Entry

This article further studies ex ante efficient auctions in the setting of Stegeman (1996 Participation costs and efficient auctions, Journal of Economic Theory 71, 228–259.), where there exist entry costs for bidders who know their valuations. An alternative method is established to address efficient auctions. This method illustrates the intuition why the ex ante efficient allocation is Bayesian implementable through the Stegeman (1996) auction (a second-price auction with a reserve price equal to seller’s valuation and no entry fee). More importantly, our method leads to an alternative ex ante efficient auction that implements uniquely the efficient entry. Thus, this alternative auction solves the entry indeterminacy problem of the Stegeman (1996) auction, which generally induces inefficient entry equilibria besides the efficient ones.      

Prospect theory for continuous distributions

We extend the original form of prospect theory by Kahneman and Tversky from finite lotteries to arbitrary probability distributions, using an approximation method based on weak-⋆ convergence. The resulting formula is computationally easier than the corresponding formula for cumulative prospect theory and makes it possible to use prospect theory in future applications in economics and finance. Moreover, we suggest a method how to incorporate a crucial step of the “editing phase” into prospect theory and to remove in this way the discontinuity of the original model.

Negotiating the ‘state of exception’: Gypsies' encounter with the judiciary in Germany and Italy, 1860–1914

The tensions between judicial and executive authorities regarding so-called Gypsies in fin de siècle Germany and Italy reveals an inherent contradiction between the universalist dictates of the modern Rechtsstaat and the requirements of building a national state free of perceived outsiders. The frustration of executive authorities with judicial authorities who insisted on protecting the universalist individual enshrined in law pushed executive authorities to utilize the ‘state of exception' to achieve their vision of the national community. Rather than choosing to create illiberal laws that would expressly exclude Gypsies from the national body, and would resolve the tension with the judiciary, authorities in Germany and Italy instead chose to go around the law by treating Gypsies as an exception not subject to the law. The state of exception not only deprived those labelled as Gypsies of a method of resistance, since many were able to use unwilling courts to protect them from over-zealous executive authorities, but also created a group of stateless people, persecuted and lacking basic human rights.     

On the (Sample) Condorcet Efficiency of Majority Rule: An alternative view of majority cycles and social homogeneity

The Condorcet efficiency of a social choice procedure is usually defined as the probability that this procedure coincides with the majority winner (or majority ordering) in random samples, given a majority winner exists (or given the majority ordering is transitive). Consequently, it is in effect a conditional probability that two sample statistics coincide, given certain side conditions. We raise a different issue of Condorcet efficiencies: What is the probability that a social choice procedure applied to a sample matches with the majority preferences of the population from which the sample was drawn? We investigate the canonical case where the sample statistic is itself also majority rule and the samples are drawn from real world distributions gathered from national election surveys in Germany, France, and the United States. We relate the results to the existing literature on majority cycles and social homogeneity. We find that these samples rarely display majority cycles, whereas the probability that a sample misrepresents the majority preferences of the underlying population varies dramatically and always exceeds the probability that the sample displays cyclic majority preferences. Social homogeneity plays a fundamental role in the type of Condorcet efficiency investigated here.

     

Scale of Operations and Locus of Control in Market‐ Versus Mission‐Oriented Charter Schools*

Objective. The objective of this article is to investigate two distinct strands in the charter school movement: one that emphasizes school‐based management and another that emphasizes market efficiency. We were interested in whether charter schools that were founded or co‐founded by for‐profit education management organizations (EMOs) tend to pursue economies of scale and are less likely than others to implement school‐level decision making in key areas. Methods. The analysis uses data drawn from a survey we conducted of the population of charter schools in Arizona, Michigan, Pennsylvania, and Washington, DC. Results. We find that charter schools that were founded or co‐founded by EMOs tend to be larger and are less likely to exhibit decision‐making control at the school level. Conclusions. Our analysis underscores the importance of disaggregating the charter school phenomenon into its distinct constituent parts in order to draw meaningful lessons from this evolving and significant experiment in alternative education delivery mode.     

Is imprecise knowledge better than conflicting expertise? Evidence from insurers’ decisions in the United States

This paper reports the results of the first experiment in the United States designed to distinguish between two sources of ambiguity: imprecise ambiguity (expert groups agree on a range of probability, but not on any point estimate) versus conflict ambiguity (each expert group provides a precise probability estimate which differs from one group to another). The specific context is whether risk professionals (here, insurers) behave differently under risk (when probability is well-specified) and different types of ambiguity in pricing catastrophic risks (floods and hurricanes) and non-catastrophic risks (house fires). The data show that insurers charge higher premiums when faced with ambiguity than when the probability of a loss is well specified (risk). Furthermore, they tend to charge more for conflict ambiguity than imprecise ambiguity for flood and hurricane hazards, but less in the case of fire. The source of ambiguity also impacts causal inferences insurers make to reduce their uncertainty.     

Dynamic focal points in N-person coordination games

To understand how groups coordinate, we study infinitely repeated N-player coordination games in the context of strategic uncertainty. In a situation where players share no common language or culture, ambiguity is always present. However, finding an adequate principle for a common language is not easy: a tradeoff between simplicity and efficiency has to be made. All these points are illustrated on repeated N-player coordination games on m loci. In particular, we demonstrate how a common principle can accelerate coordination. We present very simple rules that are optimal in the space of all languages for m (number of coordination loci) from 2 to 5 and for all N, the number of players. We also show that when more memory is used in the language (strategies), players may not coordinate, whereas this is never the case when players remember only the previous period.     

Men Don't Put on Make-up: Toddlers' Knowledge of the Gender Stereotyping of Household Activities

Toddlers’ knowledge of the stereotyping of traditionally feminine and masculine household activities was examined in two experiments. The experiments used a generalized imitation paradigm which required toddlers (total N = 63) to select a male or female doll to imitate nine masculine, feminine and neutral activities (e.g., shaving, vacuuming, sleeping). In the first experiment, 24‐month‐old girls, but not boys, demonstrated knowledge of both feminine and masculine activities. Results from study 2 indicated that boys possess some knowledge of these stereotyped activities by the age of 31 months. The results of the two experiments suggested that knowledge about the gender stereotyping of familiar activities can be demonstrated in children as young as 24 months.     

Impacts of child development accounts on parenting practices: evidence from a randomised statewide experiment

ABSTRACT

This study examines the impact of Child Development Accounts (CDAs) on parenting practices of mothers with young children in a statewide randomised experiment conducted in the United States. The experiment included 2704 primary caregivers of children born in Oklahoma during 2007: 1358 were randomly assigned to the treatment group and 1346 to the control group. Structural equation modelling suggests that the punitive-parenting score among treatment participants was .12 standard deviations smaller than that among control participants (p < . 05). Findings indicate that CDAs reduce punitive parenting, and may serve as an additional tool for positive parent–child interactions.     

Insurance for low-probability hazards: A bimodal response to unlikely events

Two insurance experiments using real-money consequences and multiple rounds to provide experience are described. In the first experiment, subjects bid for insurance to prevent a fixed loss of 4 at probabilities ranging from .01 to .9. Mean bids were near expected value except at the lowest probability of.01, for which a very bimodal distribution was observed (some subjects bid zero and others bid much more than expected value). A second experiment explored this bimodality at a probability of .01 with loss increased to4 at probabilities ranging from .01 to .9. Mean bids were near expected value except at the lowest probability of.01, for which a very bimodal distribution was observed (some subjects bid zero and others bid much more than expected value). A second experiment explored this bimodality at a probability of .01 with loss increased to 40. A similar bimodal distribution was obtained that persisted over 50 rounds of experience. These laboratory results are consistent with field evidence for low-probability hazards, for which people appear either to dismiss the risks or to worry too much about them.We would like to thank Alan Carlin, Ann Fisher, Risa Palm, and David Brookshire for their helpful comments on an earlier version of this article, and Rebecca Boyce, Julie Irwin, Glenn Russell, and Joy Smith for research assistance. We also gratefully acknowledge support from the University of Colorado Council on Research and Creative Work for human subject payments and from the U.S. Environmental Protection Agency, Office of Policy, Planning and Evaluation for support for research design and analysis provided as part of Cooperative Agreement #CR812054. All errors, opinions and conclusions are the sole responsibility of the authors.     

Third-generation prospect theory

We present a new theory of decision under uncertainty: third-generation prospect theory (PT³). This retains the predictive power of previous versions of prospect theory, but extends that theory by allowing reference points to be uncertain while decision weights are specified in a rank-dependent way. We show that PT³ preferences respect a state-conditional form of stochastic dominance. The theory predicts the observed tendency for willingness-to-accept valuations of lotteries to be greater than willingness-to-pay valuations. When PT³ is made operational by using simple functional forms with parameter values derived from existing experimental evidence, it predicts observed patterns of the preference reversal phenomenon.

The <Emphasis Type="Italic">γ</Emphasis>-core in Cournot oligopoly TU-games with capacity constraints

In cooperative Cournot oligopoly games, it is known that the β-core is equal to the α-core, and both are non-empty if every individual profit function is continuous and concave (Zhao, Games Econ Behav 27:153–168, 1999b). Following Chander and Tulkens (Int J Game Theory 26:379–401, 1997), we assume that firms react to a deviating coalition by choosing individual best reply strategies. We deal with the problem of the non-emptiness of the induced core, the γ-core, by two different approaches. The first establishes that the associated Cournot oligopoly Transferable Utility (TU)-games are balanced if the inverse demand function is differentiable and every individual profit function is continuous and concave on the set of strategy profiles, which is a step forward beyond Zhao’s core existence result for this class of games. The second approach, restricted to the class of Cournot oligopoly TU-games with linear cost functions, provides a single-valued allocation rule in the γ-core called Nash Pro rata (NP)-value. This result generalizes Funaki and Yamato’s (Int J Game Theory 28:157–171, 1999) core existence result from no capacity constraint to asymmetric capacity constraints. Moreover, we provide an axiomatic characterization of this solution by means of four properties: efficiency, null firm, monotonicity, and non-cooperative fairness.     

Choices at various levels of uncertainty: An experimental test of the restated diversification theorem

Our “Restated diversification theorem” (Skogh and Wu, 2005) says that risk-averse agents may pool risks efficiently without assignment of subjective probabilities to outcomes, also at genuine uncertainty. It suffices that the agents presume that they face equal risks. Here, the theorem is tested in an experiment where the probability of loss, and the information about this probability, varies. The result supports our theorem. Moreover, it tentatively supports an evolutionary theory of the insurance industry—starting with mutual pooling at uncertainty, turning into insurance priced ex ante when actuarial information is available.     

Domestic Violence and the Exemption from Seeking Child Support: Providing Safety or Legitimizing Ongoing Poverty and Fear

This article examines the experience of low‐income women on welfare in Australia and the process of seeking child support from a violent ex‐partner, contrasting this with research from the United States and the United Kingdom. Women in Australia who fear ongoing or renewed abuse as a result of seeking child support are eligible for an exemption. However, the exemption policy does not necessarily provide the intended protection of women and children from ongoing abuse and poverty. The exemption policy route also produces an unintended outcome whereby the perpetrators of violence are financially rewarded as they do not have to pay child support. These outcomes are shaped by a complex interaction of personal, cultural and structural forces that make the process of seeking child support for women who have experienced violence extremely problematic. The article demonstrates how in Australia, as in the US and UK policy contexts, the needs of women and their children are compromised by the details of policy specification and the way policies are implemented within the different systems.