Objective and Subjective Rationality in a Multiple Prior Model

Speaker: Itzhak GILBOA
HEC, Paris

3 April 2008 - From 16:00 to 18:00


A decision maker is characterized by two binary relations. The first reflects decisions that are rational in an "objective" sense: the decision maker can convince others that she is right in making them. The second relation models decisions that are rational in a "subjective" sense: the decision maker cannot be convinced that she is wrong in making them. We impose axioms on these relations that allow a joint representation by a single set of prior probabilities. It is "objectively rational" to choose f in the presence of g if and only if the expected utility of f is at least as high as that of g given each and every prior in the set. It is "subjectively rational" to choose f rather than g if and only if the minimal expected utility of f (relative to all priors in the set) is at least as high as that of g.

Reference Point Formation over Time: A Weighting Function Approach

Speaker: Manuel BAUCELLS

5 March 2008 - From 14h00 to 16h00


Although the concept of reference point dependent preferences has been adapted to almost all fields of behavioral economics (especially marketing and behavioral finance), we still know very little about how decision makers form their reference points given a sequence of prices. Our paper provides both a theoretical framework on reference point formation over time, based on cumulative prospect theory's inverse s-shaped weighting function, and a new experimental method for eliciting subjects' individual reference points in a finance context. Consistent with our model, we document our student subjects' reference points to be best described by the first and the last price of the time series, with intermediate prices receiving smaller weights.

Improving Rational Insurance Decisions by Providing Clients with Risk Information

Speaker: Peter WAKKER
Erasmus University, Rotterdam

29 February 2008 - From 16h00 to 18h00


This lecture shows how the provision of statistical information about risks ("reduction of ambiguity") influences risk attitudes and decisions. Our analysis leans heavily on the findings of prospect theory about attitudes towards risk and ambiguity. It was part of a consultancy for a health insurance company.

BACKGROUND. In the Medicare Part D program for elderly introduced in the US on January 1, 2006, private insurance companies and health maintenance organizations (HMOs) have to compete to offer supplemental insurance. Clients now face a decision about the level of deductible to choose and about the possible buying of supplemental insurance. Thus, Winter et al. (PNAS, 2006) wrote:

If the market component of Medicare Part D is to be successful, in the sense that it provides choices that consumers want, and achieves the efficiencies it seeks, it will probably be necessary for Medicare to expand its effort to reach all consumers and provide them with information and assistance in making wise choices. . If elders are to be given sound advice on the merits of enrollment and alternative plans, community-based, privately financed advocacy organizations are likely to have to take the initiative. . At present, even the most basic information on transition probabilities for pharmacy bills and health conditions that is needed for careful calculation of the value of insurance plans is not publicly available. (pp. 7933-7934).

In the Netherlands, the health insurance company "Zorg & Zekerheid" initiated a study into the needs for statistical information of its clients.

PURPOSE: Investigate if various forms of risk-information improve rational decisions and customer satisfaction.

METHOD: The willingness to take supplemental insurance (WTT) was measured from N=476 customers before and after the receipt of risk-information. Various characteristics, such as degree of risk aversion, were measured. Descriptive and psychological results will be reported elsewhere (Timmermans et al., in preparation). Here we analyse normative implications, i.e. to what extent do various forms of information improve rational decisions and social welfare.

(1) Information about individual expenses, specified for various health services, had most effect.
(2) Not surprisingly, risk averse clients want more insurance than risk seeking clients.
(3) Surprisingly, risk information enhances the WTT among risk averse clients and decreases it among risk seeking clients. This is opposite to regression to the mean.
(4) Customer satisfaction was improved.
(5) Risk information increases the WTT among clients with high expenses and decreases it among clients with low expenses (adverse selection). DISCUSSION: (3) and (4) are normatively desirable. (5) may be desirable from the client's individual perspective, but is unwarranted from the societal perspective.

CONCLUSION: The decision whether or not to provide risk information requires a tradeoff between (5) versus (3), (4), and another advantage: reduction of health expenses due to people's increased awareness.

Défaut d'omniscience logique et choix dans l'incertain

Speaker: Jean-Christophe VERGNAUD

1 February 2008 - From 16h15 to 18h15

Attitude vis-à-vis de l'information imprécise (Attitude toward imprecise information)

Speaker: Jean-Marc TALLON

21 December 2007