Reporting probabilistic expectations with dynamic uncertainty about possible distributions

Abstract

We study how experimental subjects report subjective probability distributions in the presence of ambiguity characterized by uncertainty over a fixed set of possible probability distributions generating future outcomes. Subjects observe draws from the true but unknown probability distribution generating outcomes at the beginning of each period of the experiment and state at selected periods a) the likelihoods that each probability distribution in the set is the true distribution, and b) the likelihoods of future outcomes. We estimate heterogeneity of rules used to update uncertainty about the true distribution and rules used to report distributions of future outcomes. We find that approximately 65% of subjects report distributions by properly weighing the possible distributions using their expressed uncertainty over them, while 22% of subjects report distributions close to the distribution they perceive as most likely. We find significant heterogeneity in how subjects update their expressed uncertainty. On average, subjects tend to overweigh the importance of their prior uncertainty relative to new information, leading to ambiguity that is substantially more persistent than would be predicted using Bayes’ rule. Counterfactual simulations suggest that this persistence will likely hold in settings not covered by our experiment.

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Notes

  1. 1.

    Early surveys of subjective probability measurement include van Lenthe (1993), McClelland and Bolder (1994), and Manski (2004).

  2. 2.

    Interpreting second-order probabilities as ambiguity is common but also criticized, see Trautmann and van de Kuilen (2015a) for a discussion. Moreover, Qiu and Weitzel (2016) find the smooth model of ambiguity to perform best.

  3. 3.

    In practice each possible distribution had an equal chance of being designated the true distribution. Participants were not informed about the probability with which one of them would be drawn. This was to ensure genuine distribution uncertainty.

  4. 4.

    Graphical interfaces have been found to be effective in helping subjects report accurate probability distributions. See Goldstein and Rothschild (2014) for recent experimental evidence.

  5. 5.

    These results add to recent work suggesting that non-incentivized belief elicitation provides reliable data (see Armantier and Treich 2013 and Trautmann and van de Kuilen 2015b).

  6. 6.

    Translated written instructions are available in the Electronic Supplementary Material.

  7. 7.

    We added a treatment, where participants could hit a button “I don’t know” when they could not or did not want to express their judgement concerning the true distribution or the prediction task. As a result, this option was used only ten times (0.56%) for all elicitation periods and all subjects, and we did not find differences in responses between both treatment groups, and thus we will not discuss this treatment in great detail.

  8. 8.

    This function was initially proposed by Prelec (1998) to model how individuals overweigh or down-weigh objective probabilities, a central element of prospect theory. We use it differently than originally intended to weigh subjective probabilities that a person associates with a particular prior distribution.

  9. 9.

    We also considered a one-step approach, directly estimating (α, β, γ) by solving the following minimization problem

    $$\underset{\left( \alpha ,\beta ,\gamma \right) }{\min }\sum\limits_{t\in \mathcal{T}} \sum\limits_{k = 1}^{6}\left( \pi_{k,t}^{r}-w\left( {\mu_{t}^{j}}\right) \pi_{k}^{1}-w\left( {\mu_{t}^{j}}\right) {\pi_{k}^{2}}-w\left( \mu_{t}^{j}\right) {\pi_{k}^{3}}\right)^{2} $$

    for each subject. This one-step estimation approach turned out to be numerically unstable for many subjects.

  10. 10.

    We also estimated a specification allowing δ1 and δ2 to change over time. This proved to be numerically unstable for many subjects.

  11. 11.

    Throughout we set \({\mu ^{j}_{0}}= 0.5\) for j = 1, 2.

  12. 12.

    The analysis was conducted for the 74 subjects for whom all 5 behavioral parameters were successfully estimated.

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Acknowledgments

The authors thank Peter Wakker for very helpful comments and suggestions.

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Correspondence to Charles Bellemare.

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Bellemare, C., Kröger, S. & Sossou, K.M. Reporting probabilistic expectations with dynamic uncertainty about possible distributions. J Risk Uncertain 57, 153–176 (2018). https://doi.org/10.1007/s11166-018-9291-5

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Keywords

  • Measurement of expectations
  • Belief updating
  • Preferences under ambiguity

JEL Classifications

  • D03
  • D84
  • C50