- Lossed in Translation: An Off-the-Shelf Method to Recover Probabilistic Beliefs from Loss-Averse Agents
- Number of pages
- Amsterdam: University of Amsterdam
- CREED Working Papers
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Although strictly proper rules are designed to truthfully elicit subjective probabilistic beliefs, experimental results have shown that risk aversion causes agents to bias their reports towards the rule's baseline probability of 1/2, and a conservative preference for certain outcomes leads agents with moderate beliefs to simply report 1/2. While both of these distortions make recovery of true beliefs difficul, the second effect is particularly pernicious because it leaves the assessor unable to discriminate amongst a broad range of moderate probabilities. Applying a prospect theory model of risk preferences, we show that loss aversion can explain both of these behavioral phenomena. Using the insights of this model, we develop a modified off-the-shelft probability assessment mechanism that corrects these distortions and allows the assessor to revocer an accurate estimate of an agent's true beliefs. In an experiment, we demonstrate the effectiveness of this modification in both eliminating uninformative reports and eliciting true probabilistic beliefs.
- November 12, 2013
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.