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Savage for Dummies and Experts

Author

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  • Mohammed Abdellaoui

    (GREGHEC - Groupement de Recherche et d'Etudes en Gestion - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Peter P. Wakker

    (Erasmus University Rotterdam)

Abstract

We present a novel method-called risk equivalents-that uses a single measure to elicit discount rates while avoiding concerns about the shape of the utility function. The method is valid under discounted expected utility (DEU), and also under several of its behavioral extensions including more general models that account for a biased perception of time and risk (such as time-or likelihood-insensitivity). We implement the method in a field experiment in India measuring inter-temporal discount rates for money and the consumption of tea.We empirically observe that discount rates elicited by traditional methods are related to utility curvature, whereas discount rates elicited by risk equivalents are not. Risk equivalents also mitigate differences in discount rates measured for money and for tea, suggesting that unaddressed utility curvature may play a role in results that demonstrate good-specific discounting. Risk equivalents are general, fast and tractable, three features that are particularly useful in field studies.

Suggested Citation

  • Mohammed Abdellaoui & Peter P. Wakker, 2023. "Savage for Dummies and Experts," Post-Print hal-04955157, HAL.
  • Handle: RePEc:hal:journl:hal-04955157
    DOI: 10.1016/j.jet.2020.104991
    Note: View the original document on HAL open archive server: https://hal.science/hal-04955157v1
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    Cited by:

    1. M. Ali Khan & Metin Uyanik, 2021. "The Yannelis–Prabhakar theorem on upper semi-continuous selections in paracompact spaces: extensions and applications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(3), pages 799-840, April.
    2. Mohammed Abdellaoui & Han Bleichrodt & Enrico Diecidue & Horst Zank, 2022. "Introduction to the Special Issue in Honor of Peter Wakker," Theory and Decision, Springer, vol. 92(3), pages 433-444, April.
    3. Charles-Cadogan, G., 2021. "Utility Representation in Abstract Wiener Space," CRETA Online Discussion Paper Series 70, Centre for Research in Economic Theory and its Applications CRETA.
    4. Mikko Harju & Juuso Liesiö & Kai Virtanen, 2024. "Independent postulates for subjective expected utility," Theory and Decision, Springer, vol. 96(4), pages 597-606, June.
    5. Uyanik, Metin & Khan, M. Ali, 2022. "The continuity postulate in economic theory: A deconstruction and an integration," Journal of Mathematical Economics, Elsevier, vol. 101(C).
    6. Grace C. Liu & Willem Spanjers, 2023. "Modeling Uncertainties and Gender Differences in Entrepreneurial Decision Making," Working Paper series 23-15, Rimini Centre for Economic Analysis.
    7. Aniruddha Ghosh & Mohammed Ali Khan & Metin Uyanik, 2022. "The Intermediate Value Theorem and Decision-Making in Psychology and Economics: An Expositional Consolidation," Games, MDPI, vol. 13(4), pages 1-24, July.
    8. Gabriel Frahm & Lorenz Hartmann, 2025. "Some Notes on Savage’s Representation Theorem," Theory and Decision, Springer, vol. 98(1), pages 85-93, February.
    9. Borie, Dino, 2023. "Maxmin expected utility in Savage's framework," Journal of Economic Theory, Elsevier, vol. 210(C).
    10. Marek Kapera, 2024. "Learning, experimentation and the convergence of the discovered preferences," KAE Working Papers 2024-098, Warsaw School of Economics, Collegium of Economic Analysis.
    11. Kemal Ozbek, 2024. "Expected utility, independence, and continuity," Theory and Decision, Springer, vol. 97(1), pages 1-22, August.

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    More about this item

    Keywords

    Bayesian statistics; Behavioral foundations of economics; Foundations of statistics; Subjective expected utility;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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