Decision Making under Uncertainty: An Experimental Study in Market Settings

Federico Echenique, Taisuke Imai and Kota Saito
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Taisuke Imai: LMU Munich
Kota Saito: California Institute of Technology

No 197, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We design and implement a novel experimental test of subjective expected utility theory and its generalizations. Our experiments are implemented in the laboratory with a student population, and pushed out through a large-scale panel to a general sample of the US population. We find that a majority of subjects’ choices are consistent with maximization of some utility function, but not with subjective utility theory. The theory is tested by gauging how subjects respond to price changes. A majority of subjects respond to price changes in the direction predicted by the theory, but not to a degree that makes them fully consistent with subjective expected utility. Surprisingly, maxmin expected utility adds no explanatory power to subjective expected utility. Our findings remain the same regardless of whether we look at laboratory data or the panel survey, even though the two subject populations are very different. The degree of violations of subjective expected utility theory is not affected by age nor cognitive ability, but it is correlated with financial literacy.

Keywords: uncertainty; subjective expected utility; maxmin expected utility; revealed preference (search for similar items in EconPapers)
JEL-codes: D01 D81 D90 (search for similar items in EconPapers)
Date: 2019-11-07
New Economics Papers: this item is included in nep-exp and nep-upt
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Working Paper: Decision Making under Uncertainty: An Experimental Study in Market Settings (2021)
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