ABSTRACT. Bernheim & Sprenger (2020), BS henceforth, claimed to falsify rank dependence. Abdellaoui, Li, Wakker, & Wu (2020), AL henceforth, criticized BS. Bernheim, Royer, & Sprenger (2022), BRS henceforth, redid part of BS’s experiment. I first criticize BRS’s experiment, and then criticize them for ignoring AL’s other criticisms of BS.
ABSTRACT. Bernheim and Sprenger (2020, Econometrica) presented experimental evidence aimed to falsify rank dependence (and, thus, prospect theory). We argue that their experiment captured heuristics and not preferences. The same tests, but with procedures that avoid heuristics, have been done before, and they confirm rank dependence. Many other violations of rank dependence have been published before. Bernheim and Sprenger recommend rank-independent probability weighting with complexity aversion, but this is theoretically unsound and empirically invalid. In view of its many positive results, prospect theory with rank dependence remains the best model of probability weighting and the existing model that works best for applied economics.
ABSTRACT. This paper proposes a unified framework for optimization over two or more components (risk/time; risk/welfare; etc). Using a century-old theorem on macro-micro aggregation, we show that many existing debates, on incentive compatibility of random incentives, hedging confoundings in ambiguity measurements, equity in Harsanyi’s veil of ignorance, multiattribute risk aversion, and many others, all concern the same bifurcation question “row-first or column-first aggregation?” For a single component, behavioral models typically relax separability while maintaining monotonicity. For two or more components, this is, surprisingly, no longer possible. Then at least one monotonicity must be violated. The question of which one is equivalent to the above bifurcation question. Our analysis clarifies many ongoing debates in many fields, including the aforementioned ones. We provide diagnoses and techniques for overcoming undesirable violations of monotonicity. A mathematical online appendix shows how our framework can be used theoretically to generalize many well-known preference axiomatizations.
Last updated: 16 March, 2023
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