Flexible Approximation of Subjective Expectations using Probability Questions -An Application to the Investment Game-

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

Cahiers de recherche from CIRPEE

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: C10 C90 D39 Z13 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-knm
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Citations: View citations in EconPapers (1)

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Working Paper: Flexible Approximation of Subjective Expectations Using Probability Questions: An Application to the Investment Game (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0734

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