Eliciting decision weights by adapting de Finetti’s betting-odds method to prospect theory

This paper extends de Finetti’s betting-odds method for assessing subjective beliefs to ambiguous events. Thus, a tractable manner for measuring decision weights under ambiguity is obtained. De Finetti’s method is so transparent that decision makers can evaluate the relevant tradeoffs in complex situations. The resulting data can easily be analyzed, using nonparametric techniques. Our extension is implemented in an experiment on predicting next-day’s performance of the Dow Jones and Nikkei stock indexes, where we test the existence and nature of rank dependence, finding usual patterns. We also find violations of rank dependence.

On Myopic Stability Concepts for Hedonic Games

We present a unified look at myopic stability concepts for hedonic games, and discuss the status of the existence problems of stable coalition structures. In particular, we show that contractual strictly core stable coalition structures always exist, and present a sufficient condition for the existence of contractually Nash stable coalition structures on the class of separable games. We gratefully acknowledge financial support from the Alexander von Humboldt Foundation (D. Dimitrov)“by “D. Dimitrov gratefully acknowledges financial support from the Alexander von Humboldt Foundation.     

Whom should we believe? Aggregation of heterogeneous beliefs

We examine the collective risk attitude of a group with heterogeneous beliefs. We prove that the wealth-dependent probability distribution used by the representative agent is biased in favor of the beliefs of the more risk tolerant consumers. Moreover, increasing disagreement on the state probability raises the state probability of the representative agent. It implies that when most disagreements are concentrated in the tails of the distribution, the perceived collective risk is magnified. This can help to solve the equity premium puzzle. We show that the trade volume and the equity premium are positively correlated.

Environmental disasters as risk regulation catalysts? The role of Bhopal,Chernobyl, Exxon Valdez,Love Canal,and Three Mile Island in shaping U.S. environmental law

Unexpected events such as environmental catastrophes capture wide public attention. Soon after five major shocks—Three Mile Island, Love Canal, Bhopal, Chernobyl, and the Exxon Valdez oil spill—Congress voted on new risk regulation. This paper conducts an event study to test whether individual congressional representatives were “shocked” by these environmental disasters into increasing their probability of voting in favor of risk legislation. On average, representatives were less likely to vote in favor of bills tied to these five events. Significant heterogeneity in representatives’ responses to these shocks is documented. Liberal Northeast representatives were most likely to increase their pro-environment voting in the aftermath of these shocks.

Can ranking techniques elicit robust values?

This paper reports two experiments which examine the use of ranking methods to elicit ‘certainty equivalent’ values. It investigates whether such methods are able to eliminate the disparities between choice and value which constitute the ‘preference reversal phenomenon’ and which thereby pose serious problems for both theory and policy application. The results show that ranking methods are vulnerable to distorting effects of their own, but that when such effects are controlled for, the preference reversal phenomenon, previously so strong and striking, is very considerably attenuated.

Conspicuous conservatism in risk choice

We analyze the risk levels chosen by agents who have private information regarding their quality, and whose performance will be judged and rewarded by outsiders. Assume that risk choice is observable. Agents will choose risk strategically to enhance their expected reputations. We show that conspicuous conservatism results: agents of different qualities choose levels below those that would be chosen if quality were observable. This happens because bad agents must cloak their identity by choosing the same risk level as good agents, and good agents are more likely to distinguish themselves if they reduce the risk level. Our results contrast starkly with those for the case when risk choice cannot be observed.

The ratio bias phenomenon: fact or artifact?

The ratio bias—according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small numbers—has recently gained momentum, with researchers especially in health economics emphasizing the policy importance of the phenomenon. Although the bias has been replicated several times, some doubts remain about its economic significance. Our two experiments show that the bias disappears once order effects are excluded, and once salient and dominant incentives are provided. This holds true for both choice and valuation tasks. Also, adding context to the decision problem does not alter this finding. No ratio bias could be found in between-subject tests either, which leads us to the conclusion that the policy relevance of the phenomenon is doubtful at best.     

Remission from Depression in the DSM: Moving from Rhetoric to Restoration

The Diagnostic and Statistical Manual of Mental Disorders, 5th Edition, the most recent edition of the Diagnostic and Statistical Manual of Mental Disorders, uses the term “remission” to describe the reduction of depressive symptoms. This paper argues that by categorizing someone who no longer has depressive symptoms as “in remission,” that person may feel indefinitely tied to his or her diagnosis. Considering the unfortunate stigma associated with mental illness, permanent linkage to diagnosis through records and professional memory may cause individuals to internalize pathology. In fact, the language of the diagnosis can affect self-perception in sensitive souls for a lifetime. As an implication for practice, we propose that cognitive and narrative therapy approaches, mood-memoirs, and use of metaphor present alternative uses of language that can reduce power imbalances between clinicians and clients, providing a bridge to healing.     

Does It Matter How We Assess Standard of Living? Evidence from Indian Slums Comparing Monetary and Multidimensional Approaches

As part of Sustainable Development Goals, the United Nations have set targets of upgrading slums and reducing poverty in all its dimensions by 2030. Policies towards improving the living conditions of slum-dwellers require proper assessment of their standard of living as well as understanding the associated characteristics. In this paper, using slum-level primary household survey data from three largest Indian cities, we, first, assess the standard of living of slum dwellers using both monetary and non-monetary approaches and then explore how various household and spatial characteristics are consistently or differently associated with both forms of assessments. We use standard monetary indicators, but to assess non-monetary standard of living, use a counting approach framework and justify the selection of specific indicators in the context of slums. Our analysis yields some interesting observations as some characteristics are differently associated with monetary and non-monetary living standards, which should affect policy designs in slums.