Doctoral Dissertation Research in Economics: Expected Utility Core of Risk Preferences

Understanding decision-making in the absence of confidence is important because many real-life decisions involve uncertainty and complicated trade-offs. Economic theories link the departure of behavior from the rational model of choice under uncertainty to the lack of decision confidence. The lack of decision confidence may arise, for instance, from individuals’ uncertainty over their willingness to take risks. This research project will use economic theory and laboratory experiments to study how people make decisions between risky alternatives and how confident they are when they make their decisions. The results of this research project will help understand how people behave as a function of their level of decision confidence. A particular emphasis will be given to decisions between safe and risky alternatives, for which it will be possible to examine whether people tend to be more risk-averse or risk-seeking when unconfident. The researchers will also conduct laboratory experiments to study the importance of experience in decision-making. In particular, the researchers will study whether people who can familiarize themselves with the decision environment before making a decision tend to become more confident about their decisions and behave more rationally. This analysis will provide new insights into the design of policies aimed at promoting socially desirable behaviors by increasing the familiarity of the targeted population with the decision environment. Moreover, the researchers will also develop and implement a novel methodology to estimate individuals’ willingness to take risks from incentivized experiments and relate this new measure to decision confidence. This novel approach may be used, for instance, by financial advisors to determine appropriate portfolio recommendations for their clients. The researchers will conduct laboratory experiments to study failures of the independence axiom, to understand their relationship with decision confidence and experience, and to elicit risk aversion for individuals who may violate the independence axiom. To this end, subjects will make choices over monetary lotteries and declare on a scale from zero to 100 how confident they are about their choices. Moreover, to study whether experience can affect decision-making, a group of subjects will be asked to observe random draws of monetary prizes from some pairs of lotteries before answering these questions. The researchers will analyze the experimental data using the notion of expected utility core, which represents the greatest part of a preference relation that satisfies the independence axiom. Studying the expected utility core amounts to testing the implications of the independence axiom locally for every single choice. This local analysis will allow reevaluating the relevance of features of the choice environment traditionally associated with higher violations of the independence axiom, most notably the presence of a certain (i.e., probability 1) alternative. Moreover, it will shed new light on the role of decision confidence and experience in decision-making under risk. In particular, the project seeks to explore the correlation between decision confidence and violations of the independence axiom and under what circumstances experience can increase confidence and reduces independence violations. The lack of confidence can arise, for instance, from indecisiveness on the level of risk aversion. This project will formalize this intuition by developing a new methodology that exploits the expected utility core to estimate a set of possible levels of risk aversion, each captured by a different utility function. This novel approach allows for a general analysis of attitudes toward risk that is robust to model misspecification because it relies neither on expected utility nor on a specific alternative model. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.