Working Paper Series, Department of Economics, Copenhagen Business School
Estimating Subjective Probabilities
(), John Fountain, Glenn W. Harrison and Elisabet E. Rutström
Abstract: Subjective probabilities play a role in many economic
decisions. There is a large theoretical literature on the elicitation of
subjective probabilities, and an equally large empirical literature.
However, there is a gulf between the two. The theoretical literature
proposes a range of procedures that can be used to recover subjective
probabilities, but stresses the need to make strong auxiliary assumptions
or “calibrating adjustments” to elicited reports in order to recover the
latent probability. With some notable exceptions, the empirical literature
seems intent on either making those strong assumptions or ignoring the need
for calibration. We illustrate how one can jointly estimate risk attitudes
and subjective probabilities using structural maximum likelihood methods.
This allows the observer to make inferences about the latent subjective
probability, calibrating for virtually any well-specified model of choice
under uncertainty. We demonstrate our procedures with experiments in which
we elicit subjective probabilities. We calibrate the estimates of
subjective beliefs assuming that choices are made consistently with
expected utility theory or rank-dependent utility theory. Inferred
subjective probabilities are significantly different when calibrated
according to either theory.
Keywords: probability; beliefs; utility theory; (follow links to similar papers)
JEL-Codes: C40; (follow links to similar papers)
68 pages, May 1, 2009
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