Reading

Question 1

What explains the characteristic curvature of the value function and weighting function? (Tversky + Kahneman 1992)

Answer 1

Diminishing sensitivity and loss aversion

Question 2

What is the valuation rule? (Tversky & Kahneman 1992)

Answer 2

A two part cumulative functional and the value is S-shaped and the weighting functions are inverse shaped

Question 3

Downsides of cumulative functional (Tversky & Kahneman 1992)

Answer 3

Despite its greater generality, the cumulative functional is unlikely to be accurate in detail. We suspect that design weights may be sensitive to the formulation of the prospects, as well as to the number, the spacing and the level of outcomes

Question 4

Certainty effect (Tversky & Kahneman 1979)

Answer 4

People underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This contributes to loss aversion

Question 5

What are the carriers of value in prospect theory? (Tversky & Kahneman 1979)

Answer 5

The carriers of value are changes in wealth or welfare, rather than financial states

Question 6

In EUT what does risk aversion derive from? (O’Donoghue & Summerville 2018)

Answer 6

In EUT, a person is risk averse if and only if the utility function over monetary wealth is concave. In other words, risk aversion derived from diminishing marginal utility for monetary wealth

Question 7

What is an issue with the loss aversion model? (O’Donoghue & Somerville 2018)

Answer 7

There is no clear answer about what the reference point should be. T&K 1979 assume it is prior wealth but applications of loss aversion have often posited different reference points

Question 8

Calibration problem (O’Donoghue & Somerville 2018)

Answer 8

EUT experiences calibration problem. This is where the model rules out seemingly plausible preferences due to a calibration problem in dealing with stakes of different sizes

Question 9

From Starmer 2000 how does evidence match up to independence axiom?

Answer 9

Evidence indicates that actual choice behaviour may systematically violate the independence axiom. CCE and CRE are examples of this

Question 10

Starmer 2000 why is it a worry that EUT isn’t perfect at predicting behaviour?

Answer 10

Because the errors are systematic

Question 11

Starmer 2000 why does preference reversal occur?

Answer 11

Likely due to failures of transitivity and procedure invariance

Question 12

Starmer 2000 what does generalised EUT assume of indifference curves?

Answer 12

Generalised EUT required indifference curves to be smooth but not necessarily linear

Question 13

Starmer 2000 what is Chew & MacCrimmon’s 1979 weighted utility theory?

Answer 13

Preferences are represented by a function where u(.) and g(.) are two different functions assigning non zero weights to all consequences

Question 14

What is betweenness? Starmer 2000

Answer 14

A crucial axiom in weighted utility theory that imposes linearity on indifference curves but is a weakened form of independence

Question 15

What is a less appealing feature of the rank dependent model? Starmer 2000

Answer 15

A less appealing feature is that a small change in the value of some outcome of a prospect can have a dramatic effect on its decision weight if the change affects the rank order of consequence but a large change in value can have no effect on the decision weight if it doesn’t alter the rank

Question 16

Describe regret theory Starmer 2000

Answer 16

In non transitive preference theory (regret theory), it is assumed that an individual compares the outcome within a given prospect giving rise to the possibility of disappointment when the outcome of a gamble compares unfavourably with what they might have had

Question 17

If you want a preference theory consistent with the data what should you avoid? Starmer 2000

Answer 17

Avoid imposing generalised fanning out and imposing betweenness. Avoid imposing linear indifference curves

Question 18

What did Thaler 1981 find out about average annual discount rates?

Answer 18

He asked subjects how much they would require in one month/ one year/ 10 years to make them indifferent to £15 now. Median responses imply average annual discount rates of 345% over 1 month, 120% over a year, and 19% over 10 years. Indicative of hyperbolic discounting

Question 19

How does read 2001 offer to explain implicit discount rates decreasing with time horizon?

Answer 19

Sub additive discounting which means the total amount of discounting over a temporal interval increases as the interval is more finely partitioned

Question 20

How are gains discounted compared to losses?

Answer 20

Gains are potentially discounted at a higher rate than losses. Thaler 1981 parking tickets

Question 21

Anticipatory utility

Answer 21

People may derive pleasure not only from current consumption but also from anticipating future consumption. This means current instantaneous utility will depend positively on future consumption

Question 22

Visceral influences

Answer 22

Hunger pain sexual desire

Question 23

How well do people evaluate the effects of visceral influences?

Answer 23

People overestimate how long a hot state will last and underestimate how quickly you can turn from a cold state to a hot state (Loewenstein & O’Donoghue 1999)

Question 24

Projection bias

Answer 24

People tend to underestimate the magnitude of the qualitative nature of their changing preferences

Question 25

What is the planner-doer model and who presents it?

Answer 25

Myopic doers interact with a unitary planner in a multiple self model (Thaler & Shefrin 1981)

Question 26

Why might people apply a bigger discount rate in experiments?

Answer 26

Anchoring of initial offer

Question 27

Pros and cons of matching tasks in determining a discount rate

Answer 27

+eliminates anchoring bias
-gives coarse answers (multiples of 10s)
-large differences in imputed discount rates among several theoretically equivalent procedures

Question 28

What 3 motives can time preferences be split into?

Answer 28

Impulsivity, compulsivity, inhibition

Question 29

What model do Karni & Safra 1990 propose?

Answer 29

Model of behaviourally consistent choice in which decision problems are formalised as trees but the choices made at different decision nodes are conceived as being controlled by separate agents even though all nodes are correspond to the same person

Question 30

When are choices made in the tree behaviourally consistent? Karni & Safra 1990

Answer 30

If they correspond to a SPNE of the extensive form game between the different agents of the decision maker

Question 31

Details of CSS 1998 experiment

Answer 31

451 subjects- mainly students
Real financial incentives
Each subject faced one decision problem

Question 32

Why don’t CSS 1998 use within subject experiments?

Answer 32

Because if subjects face more than 1 decision problem in an experiment then the experiment as a whole can be understood as a single problem of dynamic choice

Question 33

Whet do Karni & Safra 1990 suggest the violation of timing independence is due to?

Answer 33

The strategic use of the pre commitment facility by group 3 subjects- they deliberately pre committed to options which they know they would no longer want once the first staff of the problem has been completed

Question 34

What is an alternative reasoning for findings in CSS 1998?

Answer 34

Agents experience endogenous preference shifts, as a result of their experience of risk which they fail to anticipate