Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 02-2009: Dual Criteria Decisions

Steffen Andersen (), Glenn W. Harrison , Morten Igel Lau and Elisabet Rutström
Additional contact information
Steffen Andersen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Glenn W. Harrison: Department of Economics, College of Business Administration, University of Central Florida, USA
Morten Igel Lau: Department of Economics and Finance, Durham Business School, Durham University, UK
Elisabet Rutström: Department of Economics, College of Business Administration, University of Central Florida, USA

Abstract: The most popular models of decision making use a single criteria to evaluate projects or lotteries. However, decision makers may actually consider multiple criteria when evaluating projects. We consider a dual criteria model from psychology. This model integrates the familiar tradeoffs between risk and utility that economists traditionally assume, allowance for rank-dependent decision weights, and consideration of income thresholds. We examine the issues involved in full maximum likelihood estimation of the model using observed choice data. We propose a general method for integrating the multiple criteria, using the logic of mixture models, which we believe is attractive from a decision-theoretic and statistical perspective. The model is applied to observed choices from a major natural experiment involving intrinsically dynamic choices over highly skewed outcomes. The evidence points to the clear role that income thresholds play in such decision making, but does not rule out a role for tradeoffs between risk and utility or probability weighting.

Keywords: decison making; mulitple criteria; psychology

JEL-codes: D81

33 pages, January 2, 2009

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