Flexible Approximation of Subjective Expectations Using Probability Questions: An Application to the Investment Game

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

No 3121, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: decision making under uncertainty; approximation of subjective expectations; spline interpolation (search for similar items in EconPapers)
JEL-codes: C10 C81 D39 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2007-10
New Economics Papers: this item is included in nep-knm
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Citations: View citations in EconPapers (1)

Published - published separately as ‘Flexible Approximation of Subjective Expectations Using Probability Questions ‘in: Journal of Business and Economic Statistics, 2012, 30 (1), 125 - 131 and as ‘Bounding Preference Parameters under Different Assumptions about Beliefs: a Partial Identification Approach’ in: Experimental Economics, 2010, 13, 334 - 345

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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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