Adaptive Preferences: An Evolutionary Model of Non-Expected Utility and Ambiguity Aversion, with Todd Sarver, April 2024.
Journal of Economic Theory, 105840
Abstract
We enrich an evolutionary model with common and idiosyncratic uncertainty as in Robson (1996) by allowing for hidden actions (or phenotypic flexibility). In contexts where common uncertainty is ambiguous and idiosyncratic uncertainty is risky, the model generates both ambiguity aversion and non-expected-utility preferences for risk, thereby providing a link between the two types of behavior. While the general evolutionarily optimal objective function does not have an obvious similarity to functional forms studied in the literature, our main results show that it can be recast as a combination of familiar models of ambiguity aversion and non-expected utility. We show that particular classes of hidden actions generate the special cases of rank-dependent or divergence risk preferences embedded within a model of ambiguity aversion.
Subjective information choice processes, with David Dillenberger and R. Vijay Krishna [May 2023].
Theoretical Economics, Vol. 18, 529-559
Abstract
We propose a class of dynamic models that capture subjective (and hence unobservable) constraints on the amount of information a decision maker can acquire, pay attention to, or absorb, via an Information Choice Process (ICP). An ICP specifies the information that can be acquired about the payoff-relevant state in the current period, and how this choice affects what can be learned in the future. In spite of their generality, wherein ICPs can accommodate any dependence of the information constraint on the history of information choices and state realizations, we show that the constraints imposed by them are identified up to a dynamic extension of Blackwell dominance. All the other parameters of the model are also uniquely identified.
Randomly Evolving Tastes and Delayed Commitment, with R. Vijay Krishna [January 2021].
Journal of Mathematical Economics, Vol. 92, 81-94
Abstract
We consider a decision maker with randomly evolving tastes who faces dynamic decision situations that involve intertemporal tradeoffs, such as those in consumption savings problems. We axiomatize a recursive representation of choice that features uncertain consumption utilities, which evolve according to a subjective Markov process. The parameters of the representation, which are the subjective Markov process governing the evolution of utilities, and the discount factor, are uniquely identified from behavior. We relate the correlation of tastes over time and the desire to delay commitment to future consumption.
Stable Behavior and Generalized Partition with David Dillenberger [September 2019].
Some results previously appeared in “Subjective Learning” with David Dillenberger. This paper supersedes ERID-132.
Economic Theory, Vol. 68, 2019, 285-302
Abstract
Behavior is stable if the ex-ante ranking of two acts that differ only on some event I coincides with their ex-post ranking upon learning I. We identify the largest class of information structures for which the behavior of a Bayesian expected utility maximizer is stable. We call them generalized partitions, and characterize the learning processes they can accommodate. Often, the information structure is not explicitly part of the primitives in the model, and so becomes a subjective parameter. We propose a way to identify how the individual plans to choose contingent on learning an event, and establish that for a Bayesian expected utility maximizer, stable behavior — formulated in terms of this indirectly observed contingent ranking — is a tight characterization of subjective learning via a generalized partition.
Preferences with Taste Shock Representations: Price Volatility and the Liquidity Premium, with R. Vijay Krishna [June 2019].
Mathematical Social Sciences, Vol. 101, 41-46
Abstract
We consider a decision maker with randomly evolving tastes who faces dynamic decision situations that involve intertemporal tradeoffs, such as those in consumption savings problems. We axiomatize a recursive representation of choice that features uncertain consumption utilities, which evolve according to a subjective Markov process. The parameters of the representation, which are the subjective Markov process governing the evolution of utilities, and the discount factor, are uniquely identified from behavior. We relate the correlation of tastes over time and the desire to delay commitment to future consumption.
Magical Thinking: A Representation Result, with Brendan Daley [May 2017].
Theoretical Economics, Vol 12, 909-956
Supplementary Appendix
Abstract
This paper suggests a novel way to import the approach of axiomatic theories of individual choice into strategic settings and demonstrates the benefits of this approach. We propose both a tractable behavioral model as well as axioms applied to the behavior of the collection of players, focusing first on Prisoners’ Dilemma games. A representation theorem establishes these axioms as the precise behavioral content of the model, and that the model’s parameters are (essentially) uniquely identified from behavior. The behavioral model features magical thinking: players behave as if their expectations about their opponents’ behavior vary with their own choices. The model provides a unified view of documented behavior in a range of often-studied games, such as the Prisoners’ Dilemma, the Battle of the Sexes, Hawk-Dove, and the Stag Hunt, and also generates novel predictions across games.
Overeagerness [November 2016].
Journal of Economic Behavior and Organization, Vol 131(A), 114-125
AbstractWe capture the impression that high types may send lower signals than low types in order not to appear too desperate. We require a noisy one-dimensional signal, where a very low signal being transmitted forces types to execute their outside option. The central assumption is that low types are not only less productive when employed, but that they also face a worse outside option. High types then exploit low types’ eagerness not to end up with their bad outside option by running a larger risk of transmitting a very low signal.
A Theory of Subjective Learning, with David Dillenberger, Juan Lleras, and Norio Takeoka [September 2014].
Some results previously appeared in “Subjective Learning” with David Dillenberger.
Journal of Economic Theory, Vol 153, 287-312
Abstract
We study an individual who faces a dynamic decision problem in which the process of information arrival is unobserved by the analyst. We elicit subjective information directly from choice behavior by deriving two utility representations of preferences over menus of acts. One representation uniquely identifies information as a probability measure over posteriors and the other identifies information as a partition of the state space. We compare individuals who expect to learn differently in terms of their preference for flexibility. On the extended domain of dated-menus, we show how to accommodate gradual learning over time by means of a subjective filtration.
Dynamic Preference for Flexibility, with R. Vijay Krishna [May 2014].
Econometrica, Vol 82(2), 655-704
Abstract
We consider a decision maker who faces dynamic decision situations that involve intertemporal tradeoffs, as in consumption-savings problems, and who experiences taste shocks that are transient contingent on the state of the world. We axiomatize a recursive representation of choice over state contingent infinite horizon consumption problems, where uncertainty about consumption utilities depends on the observable state and the state follows a subjective Markov process. The parameters of the representation are the subjective process governing the evolution of beliefs over consumption utilities and the discount factor; they are uniquely identified from behavior. We characterize a natural notion of greater preference for flexibility in terms of a dilation of beliefs. An important special case of our representation is a recursive version of the Anscombe-Aumann model with parameters that include a subjective Markov process over states and state dependent utilities, all of which are uniquely identified.
Contingent Preference for Flexibility: Eliciting Beliefs from Behavior [May 2013].
Theoretical Economics, Vol 8, 503-534
Abstract Following Kreps (1979), I consider a decision maker who is uncertain about her future taste. This uncertainty leaves the decision maker with a preference for flexibility: When choosing among menus containing alternatives for future choice, she weakly prefers menus with additional alternatives. Standard representations accommodating this choice pattern cannot distinguish tastes (indexed by a subjective state space) and beliefs (a probability measure over the subjective states) as different concepts. I allow choice between menus to depend on objective states. My axioms provide a representation that uniquely identifies beliefs, provided objective states are sufficiently relevant for choice. I suggest that this result could provide choice theoretic substance to the assumption, commonly made in the (incomplete) contracting literature, that contracting parties who know each others’ ranking of contracts, also share beliefs about each others’ future tastes in the face of unforeseen contingencies.
Ashamed to be Selfish, with David Dillenberger [January 2012].
Theoretical Economics, Vol 7, 99-124
Abstract
We study a decision maker (DM) who has preferences over choice problems, which are sets of payoff-allocations between herself and a passive recipient. An example of such a set is the collection of possible allocations in the classic dictator game. The choice of an allocation from the set is observed by the recipient, whereas the choice of the set itself is not. Behaving selfishly under observation, in the sense of not choosing the normatively best allocation, inflicts shame on DM. We derive a representation that identifies DM’s private ranking of allocations, her subjective norm, and shame. The normatively best allocation can be further characterized as the Nash solution of a bargaining game induced by the second-stage choice problem.
