Sources of Uncertainty and Subjective Prices
M. Marinacci and
Authors registered in the RePEc Author Service: Pierpaolo Battigalli ()
No 628, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University
We develop a general framework to study source-dependent preferences in economic contexts. We behaviorally identify two key features. First, we drop the assumption of uniform uncertainty attitudes and allow for source-dependent attitudes. Second, we introduce subjective prices to compare outcomes across different sources. Our model evaluates profiles source-wise, by computing the source-dependent certainty equivalents; the latter are converted into the unit of account of a common source and then aggregated into a unique evaluation. By viewing time and location as instances of sources, we show that subjective discount factors and subjective exchange rates are emblematic examples of subjective prices. Finally, we use the model to explore the implications on optimal portfolio allocations and home bias. Key words: source preference, source-dependent uncertainty attitudes, subjective prices, competence hypothesis, home bias
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