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

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  • Bellemare, Charles

    (Université Laval)

  • Bissonnette, Luc

    (Laval University)

  • Kröger, Sabine

    (Université Laval)

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.

Suggested Citation

  • Bellemare, Charles & Bissonnette, Luc & Kröger, Sabine, 2007. "Flexible Approximation of Subjective Expectations Using Probability Questions: An Application to the Investment Game," IZA Discussion Papers 3121, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3121
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    Cited by:

    1. Charles Bellemare & Luc Bissonnette & Sabine Kröger, 2010. "Bounding preference parameters under different assumptions about beliefs: a partial identification approach," Experimental Economics, Springer;Economic Science Association, vol. 13(3), pages 334-345, September.

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    More about this item

    Keywords

    decision making under uncertainty; approximation of subjective expectations; spline interpolation;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • D39 - Microeconomics - - Distribution - - - Other

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