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. When measuring ambiguity attitudes one should control for subjective beliefs, but those are usually not directly observable. Hence, measurements focused on artificial events (secretized urns or researcher-specified probability intervals), where beliefs could be inferred from symmetry conditions. For application-relevant events, however, such symmetries are rarely available. This paper solves this problem. We show that ambiguity attitudes then can still be identified by using belief hedges—collections of events that protect against unknown beliefs. We define two indexes of ambiguity attitudes that can be used under all ambiguity models popular today. This solves a second problem: there are (too) many ambiguity models today, leaving practitioners at a loss to choose one. Our indexes are compatible with virtually all existing indexes and ambiguity orderings wherever those are defined, showing that they properly capture the general ambiguity concepts. We ensure that the indexes are directly observable from revealed preferences, and we axiomatize them.
Last updated: 16 March, 2021
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