Lossed in translation: an off-the-shelf method to recover probabilistic beliefs from loss-averse agents

Theo Offerman () and Asa B. Palley ()
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Theo Offerman: CREED, University of Amsterdam
Asa B. Palley: Duke University

Experimental Economics, 2016, vol. 19, issue 1, No 1, 30 pages

Abstract: Abstract Strictly proper scoring rules are designed to truthfully elicit subjective probabilistic beliefs from risk neutral agents. Previous experimental studies have identified two problems with this method: (i) risk aversion causes agents to bias their reports toward the probability of $$1/2$$ 1 / 2 , and (ii) for moderate beliefs agents simply report $$1/2$$ 1 / 2 . 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 simple off-the-shelf probability assessment mechanism that encourages loss-averse agents to report true beliefs. In an experiment, we demonstrate the effectiveness of this modification in both eliminating uninformative reports and eliciting true probabilistic beliefs.

Keywords: Scoring rule; Subjective probability assessment; Loss aversion; Prospect theory (search for similar items in EconPapers)
JEL-codes: C81 C91 D03 D81 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10683-015-9429-0

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