Prince: An improved method for measuring incentivized preferences

This paper introduces the Prince incentive system for measuring preferences. Prince combines the tractability of direct matching, allowing for the precise and direct elicitation of indifference values, with the clarity and validity of choice lists. It makes incentive compatibility completely transparent to subjects, avoiding the opaqueness of the Becker-DeGroot-Marschak mechanism. It can be used for adaptive experiments while avoiding any possibility of strategic behavior by subjects. To illustrate Prince’s wide applicability, we investigate preference reversals, the discrepancy between willingness to pay and willingness to accept, and the major components of decision making under uncertainty: utilities, subjective beliefs, and ambiguity attitudes. Prince allows for measuring utility under risk and ambiguity in a tractable and incentive-compatible manner even if expected utility is violated. Our empirical findings support modern behavioral views, e.g., confirming the endowment effect and showing that utility is closer to linear than classically thought. In a comparative study, Prince gives better results than a classical implementation of the random incentive system.

The Disposition Effect under the Reference Dependent Smooth Model of Ambiguity

The disposition effect is a commonly observed puzzle in financial markets. Several theoretical explanations for the disposition effect have been provided; however, it remains unresolved. We attempt to explain the effect by incorporating ambiguity attitudes that vary depending on the reference point. We extend the smooth model of ambiguity by Klibanoff, P., M. Marinacci, and S. Mukerji. 2005. “A Smooth Model of Decision Making under Ambiguity.” Econometrica 73: 1849–92 to depend on the reference point. Numerical examples show that the disposition effect is more pronounced under our reference-dependent smooth model of ambiguity if the investor gets her/his utility from the realized gains and losses.

Risk and ambiguous choices: individual versus groups, an experimental analysis

PurposeThis study examines individual ambiguity attitudes alone and in groups by leveraging the descriptive model of anchoring and adjustment on decision-making under ambiguity. The study extends Ellsberg's probability ambiguity to outcome ambiguity and examines decisions made under both ambiguities, at different likelihood levels and under the domain of gains and losses.Design/methodology/approachThe methodology selected for this study is a two-stage within-subject lab experiment, with participants from different Indian universities. Each participant made 12 lottery decisions at the individual level and at individuals in the group level.FindingsThe results show that ambiguity attitudes are not universal in nature. Ambiguity seeking as a dominant choice was observed at both the individual level and at individual in the group level. However, the magnitude of ambiguity seeking or ambiguity aversion contingent upon the domain of gains and losses differed widely across the individual level and at individuals in the group level.Research limitations/implicationsThe study enables to contribute toward giving a robust descriptive explanation for individual behavior in real-world applications of finance. It aims to provide direction for theoretical normative models to accommodate heterogeneity of ambiguity attitudes.Originality/valueThe study is novel as it examines a two-dimensional approach by representing ambiguity in probability and in outcomes. It also analyzes whether decisions under ambiguity vary when individuals make decisions alone and when they make it in groups.