Estimating Subjective Probabilities (2010)

Type of Content
Discussion / Working PapersPublisher
Center for the Economic Analysis of RiskUniversity of Canterbury. Department of Economics and Finance
Related resource(s)
http://cear.gsu.edu/files/Estimating_Subjective_Probabilities.pdfCollections
- Business: Working Papers [193]
Abstract
Subjective probabilities play a role in many economic decisions. There is a large theoretical literature on the elicitation of subjective probabilities, and an equally large empirical literature. However, there is a gulf between the two. The theoretical literature proposes a range of procedures that can be used to recover subjective probabilities, but stresses the need to make strong auxiliary assumptions or “calibrating adjustments” to elicited reports in order to recover the latent probability. With some notable exceptions, the empirical literature seems intent on either making those strong assumptions or ignoring the need for calibration. We illustrate how the joint estimation of risk attitudes and subjective probabilities using structural maximum likelihood methods can provide the calibration adjustments that theory calls for. This allows the observer to make inferences about the latent subjective probability, calibrating for virtually any well-specified model of choice under uncertainty. We demonstrate our procedures with experiments in which we elicit subjective probabilities. We calibrate the estimates of subjective beliefs assuming that choices are made consistently with expected utility theory or rank-dependent utility theory. Inferred subjective probabilities are significantly different when calibrated according to either theory, thus showing the importance of undertaking such exercises. Our findings also have implications for the interpretation of probabilities inferred from prediction markets.
Citation
Andersen, S., Fountain, J., Harrison, G.W., Rutström, E.E. (2010) Estimating Subjective Probabilities. 59pp..This citation is automatically generated and may be unreliable. Use as a guide only.
Keywords
subjective probability; belief elicitation; non expected utilityANZSRC Fields of Research
49 - Mathematical sciences::4905 - Statistics::490506 - Probability theory38 - Economics::3802 - Econometrics::380202 - Econometric and statistical methods
35 - Commerce, management, tourism and services::3502 - Banking, finance and investment::350208 - Investment and risk management
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