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Behavioral welfare economics and risk preferences: a Bayesian approach

Author

Listed:
  • Xiaoxue Sherry Gao

    (University of Massachusetts Amherst)

  • Glenn W. Harrison

    (Robinson College of Business, Georgia State University
    University of Cape Town)

  • Rusty Tchernis

    (Georgia State University)

Abstract

We propose the use of Bayesian estimation of risk preferences of individuals for applications of behavioral welfare economics to evaluate observed choices that involve risk. Bayesian estimation provides more systematic control of the use of informative priors over inferences about risk preferences for each individual in a sample. We demonstrate that these methods make a difference to the rigorous normative evaluation of decisions in a case study of insurance purchases. We also show that hierarchical Bayesian methods can be used to infer welfare reliably and efficiently even with significantly reduced demands on the number of choices that each subject has to make. Finally, we illustrate the natural use of Bayesian methods in the adaptive evaluation of welfare.

Suggested Citation

  • Xiaoxue Sherry Gao & Glenn W. Harrison & Rusty Tchernis, 2023. "Behavioral welfare economics and risk preferences: a Bayesian approach," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 273-303, April.
    • Handle: RePEc:kap:expeco:v:26:y:2023:i:2:d:10.1007_s10683-022-09751-0
    DOI: 10.1007/s10683-022-09751-0
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    References listed on IDEAS

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    14. Glenn W. Harrison & Jia Min Ng, 2018. "Welfare effects of insurance contract non-performance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 39-76, May.
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    Cited by:

    1. Glenn W. Harrison, 2024. "Risk preferences and risk perceptions in insurance experiments: some methodological challenges," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 49(1), pages 127-161, March.
    2. Robert Finger & Viviana Garcia & Chloe McCallum & Jens Rommel, 2024. "A note on European farmers' preferences under cumulative prospect theory," Journal of Agricultural Economics, Wiley Blackwell, vol. 75(1), pages 465-472, February.
    3. Harrison, Glenn W. & Kairies-Schwarz, Nadja & Han, Johann, 2024. "Deductibles and health care utilization: An experiment on the role of forward-looking behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 717-748.

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    More about this item

    Keywords

    Behavioral welfare economics; Bayesian analysis; Risk preferences; Insurance;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G40 - Financial Economics - - Behavioral Finance - - - General

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