Research Seminars

Communication, consensus, and order. Who wants to speak first ?

Speaker: Lucie MENAGER
Paris II

30 May 2008 - From 16:15 to 18:00

Parikh and Krasucki [6] show that, in a group of rational agents, communication of the value of a function f leads to a consensus on the value of f, provided some conditions on the communication protocol and the function f hold. In this article,
we address the issue of the influence of the protocol on the outcome of the communication process, when agents value
information positively. We show that, if it is common knowledge in a group of agents that some of them disagree on two protocols, then the consensus value of f must be the same for both protocols.

Updating Ambiguity Averse Preferences

Speaker: Peter Klibanoff
Kellogg School of Management

28 May 2008 - From 10:00 to 12:00

Dynamic consistency leads to Bayesian updating under expected utility. We ask what it implies for the updating of more general preferences. In this paper, we characterize dynamically consistent update rules for preference models satisfying ambiguity aversion. We then apply our general results to characterize dynamically consistent updating for two important models of ambiguity averse preferences: the ambiguity averse smooth ambiguity preferences (Klibanoff, Marinacci and Mukerji [Econometrica 73 2005, pp. 1849-1892]) and the variational preferences (Maccheroni, Marinacci and Rustichini [Econometrica 74 2006, pp. 1447-1498]). The latter includes max-min expected utility (Gilboa and Schmeidler [Journal of Mathematical Economics 18 1989, pp. 141-153]) and the multiplier preferences of Hansen and Sargent [American Economic Review 91(2) 2001, pp. 60-66] as special cases. For smooth ambiguity preferences, we also identify a simple rule that is shown to be the unique dynamically consistent rule among a large class of rules that may be expressed as reweightings of Bayes' rule.

On the Principle of Consistency

Speaker: Horst Zank
University of Manchester

21 May 2008 - From 14:00 to 16:00

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A Theory of Bayesian Decision Making

Speaker: Edi Karni
John Hopkins, HEC

7 May 2008 - From 14:00 to 16:00

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This paper presents a complete, choice-based, axiomatic Bayesian decision theory. It introduces a new choice set consisting of information-contingent plans for choosing actions and bets and subjective expected utility model with effect-dependent utility functions and action-dependent subjective probabilities which, in conjunction with the updating of the probabilities using Bayes' rule, gives rise to a unique prior and a set of action-dependent posterior probabilities representing the decision maker's prior and posterior beliefs.

Multiple Expectations, Disappointment, and Risk Measures: A Unifying Model of Decision under Risk

Speaker: Philippe DELQUIE
INSEAD

16 April 2008 - From 14h00 to 16h00

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The standard theory of Disappointment is built on the assumption that an individual forms a prior expectation about a risky prospect and will experience disappointment if the outcome obtained falls below the expectation. Here we abandon the hypothesis of a well-defined prior expectation: we propose instead that disappointment may arise from comparing the outcome received with any of the prospect's missed outcomes. This alternative behavioral hypothesis yields the so-called Disappointment without Prior Expectation (DWPE) model, which bridges a number of landmark theories of choice under risk that have evolved from distinct intellectual paths. For example, DWPE leads to a Rank Dependent Utility representation. Second, DWPE is equivalent to a general class of Risk-Value models, an appealing structure because decision makers often seek to rank projects in terms of two criteria: reward and risk. The new risk measure we obtain includes some classic measures such as the Variance or Gini Mean Difference, but it is not part of the families traditionally considered. We show necessary and sufficient conditions for this risk measure to satisfy first- and second-order stochastic dominance (thus generalizing results by Yitzhaki 1982) and coherence, key properties required for prescriptive applications, e.g. in Finance, Insurance, or R&D portfolio selection. Results from calibration of the model to experimental data will be presented.

Objective and Subjective Rationality in a Multiple Prior Model

Speaker: Itzhak GILBOA
HEC, Paris

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

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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
IESE

5 March 2008 - From 14h00 to 16h00

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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

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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.

RESULTS:
(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
CNRS & CES

1 February 2008 - From 16h15 to 18h15

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

Speaker: Jean-Marc TALLON
CNRS & CES

21 December 2007


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