Pietro Ortoleva - US grants

This award funds research in behavioral economics that will analyze the possible relationships between economic behaviors using new data and new modeling methods.

Over the past thirty years, behavioral and experimental economists have made great strides in identifying behaviors that are hard to explain using the classic model of economic decision making: these include violations of expected utility theory such as the Allais paradox, ambiguity aversion, present bias, loss aversion and the endowment effect. All of these behaviors have been shown to affect important economic decisions, and have been the subject of enormous amounts of attention by researchers. However, far less attention has been paid to the links between these behaviors. This project examines these links both empirically and theoretically.

The first part of the project employs a laboratory experiment to measure a long list of well-known behavioral phenomena, including the ones listed above, in a single group of subjects, allowing the researchers to estimate the empirical relationship between them. Using these data they are then able to test the predictions of existing models about these relationships, and can use these results to guide their theoretical model. The second project develops part of that model, through a link between two particular behavioral biases: the Allais paradox in choice over risky prospects (i.e. where the probabilities of different outcomes are known) and the Ellsberg paradox in choice over uncertain prospects (i.e. where the probabilities of different outcomes are not known). Both behaviors can be explained by a unique behavioral axiom -- a generalized preference for hedging. This model will potentially be helpful in understanding behavior in environments that have both risk and uncertainty (such as financial decision making) and to capture more precisely the agent's attitude towards each of them. The third project extends the empirical work from project 1 by repeating the same experiment with a different subject pool, focusing on: (1) a representative sample of the US population; (2) subjects who suffer from anxiety and depression; (3) subjects primed into various emotional states.

Because the economic behaviors studied in this project are so ubiquitous, this grant could have a wide impact in many areas of the social sciences. For macroeconomists, who have long understood the impact of these biases on economic performance, understanding the relationship between them is necessary for understanding the distribution of economic outcomes. For policy makers, an understanding of any common cause to these biases could prove to be very helpful for any attempt to rectify them. For neuroeconomists and psychologists, such an understanding could aid the search for the biological bases of economic behavior.

This project will focus on identifying fundamental attributes of economic decision making, a set of measurements that the researchers call "econographics. The project also will focus on measuring econographics in countries throughout the world and within the U.S. over time, and as well as examining how these attributes relate to popular attitudes and participation in governmental processes. The researchers will conduct an incentivized survey that will measure econographics across thirteen countries, and over three times within the U.S. The countries selected to survey include many different types of governmental and economic environments, including parliamentary democracies with high redistribution, federal systems with a large informal economies, transitional democracies, developing democracies and authoritarian states. These states also have a variety of economic systems. Through their measurement of econographics across a broad spectrum of countries, the researchers will test hypotheses related to the processes through which these fundamental attributes correspond with the political environment and with economic performance. The three survey waves within the U.S. will straddle a national election to examine how major national events, which are known to change popular attitudes, affect econographics.

This project will provide new metrics to assess fundamentals of economic culture and decision making, and it will facilitate new modes of research to link behavioral economics with other social and behavioral science fields. The project will provide new insights related to the conduct of large-scale, cross-country, incentivized surveys, thereby facilitating future research based on empirical tests on representative samples of the population rather than on subjects in a social science laboratory. The project will provide valuable education and training opportunities for post-doctoral researchers and graduate students, and project results will provide valuable information and insights to assist policy makers and others in determining the most effective ways to attain socially desirable goals. This project is supported through the NSF Interdisciplinary Behavioral and Social Sciences Research (IBSS) competition.

Economists who study how people make decisions have for many years started from the assumption that if an individual is faced with a choice between different alternatives, he or she can order the options from "most preferred" to "least preferred", as well as a number of other assumptions. However, a wide range of evidence now demonstrates that this theory is not able to explain how many people make certain specific kinds of decisions -- for example, the highest price someone is willing to pay for an object is often lower than the lowest price he or she is willing to accept to go without the same object. This award will fund the PI's continued efforts to develop alternative models of behavior based on the idea that individuals may not be able to compare all options; in other words, people have incomplete preferences. The PI plans to consider whether and how this theory can account for a range of document decision making behaviors. He also plans to conduct decision making experiments in a lab environment to test hypotheses drawn from the theory. The results will advance our scientific understanding of this kind of human decision-making, and could be useful to businesses and governments that need to predict how individuals will respond to new products and policies.

The research will focus on developing a model in which subjects' preferences may be incomplete, and using that model to analyze several specific biases in decision making: the gap between willingness to accept and willingness to pay, certainty effects, decision in stochastic environments, and intertemporal choice. The goal is to provide axiomatic characterizations of models in which subjects chose to randomize, including a special case where the desire to randomize comes from the agents' uncertainty about her own utility of consumption. The project will also include work on preferences on lotteries over consumption streams and will introduce an axiom that captures aversion to variability of consumption over time.