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Title: Flexible Approximation of Subjective Expectations using Probability Questions - An Application to the Investment Game -
Authors: Bellemare, Charles
Bissonnette, Luc
Kröger, Sabine
Keywords: Approximation of subjective expectations
Spline interpolation
Decision making under uncertainty
Issue Date: 2007-10
Series/Report no.: Cahiers du CIRPÉE;07-34
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.
URI: http://132.203.59.36/CIRPEE/cahierscirpee/2007/files/CIRPEE07-34.pdf
https://depot.erudit.org/id/001097dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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