Flexible Approximation of Subjective Expectations Using Probability Questions: An Application to the Investment Game

Charles Bellemare (), Luc Bissonnette () and Sabine Kröger ()

No 3121, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: We use spline interpolation to approximate the subjective cumulative distribution function of an economic agent over the future realization of a continuous (possibly censored) random variable. The method proposed exploits information collected using a small number of probability questions on expectations and requires a weak prior knowledge of the shape of the underlying distribution. We find that eliciting 4 or 5 points on the cumulative distribution function of an agent is sufficient to accurately approximate a wide variety of underlying distributions. We show that estimated moments of general functions of the random variable can be computed analytically and/or using standard simulation techniques. We illustrate the usefulness of the method by estimating a simple model to asses the impact of expectations on investment decisions in a commonly used trust game.

Keywords: approximation of subjective expectations; spline interpolation; decision making under uncertainty (search for similar items in EconPapers)
JEL-codes: C81 C10 D39 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-knm
Date: 2007-10
View list of references

Downloads: (external link)
ftp://repec.iza.org/RePEc/Discussionpaper/dp3121.pdf (application/pdf)

Related works:
Working Paper: Flexible Approximation of Subjective Expectations using Probability Questions -An Application to the Investment Game- (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:iza:izadps:dp3121

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute for the Study of Labor (IZA)
Address: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Contact information at EDIRC.
Series data maintained by Mark Fallak ().