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Dual criteria decisions.

Andersen, S. and Harrison, G. W. and Lau, M. I. and Rutström, E. E. (2014) 'Dual criteria decisions.', Journal of economic psychology., 41 . pp. 101-113.

Abstract

The most popular models of decision making use a single criterion to evaluate projects or lotteries. However, decision makers may actually consider multiple criteria when evaluating projects. We consider a dual criteria model from psychology. This model integrates the familiar tradeoffs between risk and utility that economists traditionally assume, allowance for rank-dependent decision weights, and consideration of income thresholds. We examine the issues involved in full maximum likelihood estimation of the model using observed choice data. We propose a general method for integrating the multiple criteria, using the logic of mixture models, which we believe is attractive from a decision-theoretic and statistical perspective. The model is applied to observed choices from a major natural experiment involving intrinsically dynamic choices over highly skewed outcomes. The evidence points to the clear role that income thresholds play in such decision making, but does not rule out a role for tradeoffs between risk and utility or probability weighting.

Item Type:Article
Keywords:Risk, Multiple criteria, Individual decision making, Natural experiment.
Full text:(AM) Accepted Manuscript
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Status:Peer-reviewed
Publisher Web site:http://dx.doi.org/10.1016/j.joep.2013.02.006
Publisher statement:NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Psychology. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Psychology, 41, 2014, 10.1016/j.joep.2013.02.006.
Record Created:22 Jul 2014 09:50
Last Modified:22 Jul 2014 14:23

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