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“Time for Memorable Consumption” (with Stefania Minardi) 〈2018-07-09〉
Abstract: A consumption event is memorable if its memory affects an agent's well-being at times after the material consumption. We develop an axiomatic model of memorable consumption in a dynamic setting. The representation takes the form of exponential discounting, and features additional terms that accumulate utility from the recollection of past consumption. We analyze alternative processes by which the memorable effect accrues over time and show that our model supports well-known phenomena in psychology, such as the peak-end rule, duration neglect, and adaptation trends. We study a prominent special case in which memory evolves according to a Markovian law and develop comparative statics with respect to strength and longevity of memory. As an application, we introduce memorable consumption into the standard linear-quadratic consumption-savings problem and examine its implications for life-cycle patterns.
“Subjective Contingencies and Limited Bayesian Updating” (with Stefania Minardi) 〈2017-05-01〉
Abstract: We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. One key property of the model is a subjective version of the dynamic consistency axiom. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias.
“Preferences With Grades of Indecisiveness” (with Stefania Minardi), Journal of Economic Theory, 2015, vol. 155, pp. 300–331
Abstract: Departing from the traditional approach of modeling indecisiveness based on the weakening of the completeness axiom, we introduce the notion of graded preferences: The agent is characterized by a binary relation over (ordered) pairs of alternatives, which allows her to express her inclination to prefer one alternative over another and her confidence in the relative superiority of the indicated alternative. In the classical Anscombe-Aumann framework, we derive a representation of a graded preference by a measure of the set of beliefs that rank one option better than the other. Our model is a refinement of Bewley's model of Knightian uncertainty: It is based on the same object of representation — the set of beliefs — but provides more information about how the agent compares alternatives.
(working paper version following the cardinal approach) 〈2013-07-31〉
“A Note on Preferences With Grades of Indecisiveness Without Reciprocity” (with Stefania Minardi) 〈2013-08-05〉
“Decision-Making under Subjective Risk: Toward a General Theory of Pessimism” (with Anna Gumen and Efe A. Ok) 〈2014-03-20〉
Abstract: The primary objective of this paper is to develop a framework in which a decision-maker may have subjective beliefs about the “riskiness” of prospects, even though the risk structure of these prospects is objectively specified. Put differently, we investigate preferences over risky alternatives by postulating that such preferences arise from more basic preferences that act on the subjective transformations of these prospects. This allows us to derive a theory of preferences over lotteries with distorted probabilities and provides information about the structure of such distortions. In addition, we are able to formulate a behavioral trait such as “pessimism” in the context of risk (independently of any sort of utility representation) as a particular manifestation of the uncertainty aversion phenomenon. Our framework also provides a strong connection between the notions of aversion to ambiguity and risk which have so far been regarded as distinct traits in decision theory. In particular, we find that, in the presence of some basic assumptions, the decision-maker distorts probabilities and has non-expected utility preferences if and only if he is not neutral towards ambiguity.
“Mistake Aversion and a Theory of Robust Decision Making” 〈2014-02-21〉
Abstract: This paper studies the behavioral trait of aversion to making mistakes in the framework of choice under subjective uncertainty, assuming that the probabilities of outcomes are not exogenously specified. The decision procedure that is proposed to capture mistake aversion follows the general approach of robust decision making: For each probability distribution that may plausibly describe the uncertainty, the decision maker computes his expected utility, and discards the feasible choice options that cannot guarantee a particular level of utility relative to his default option. The paper then follows the revealed preferences approach to study foundations of this procedure and the comparative notion of mistake aversion. As shown in an application, the proposed model is capable of generating higher risk premia and the effects of the volatility of payoffs on asset prices and returns that are different than in the standard models.
“A Confidence-Based Decision Rule and Ambiguity Attitudes” (with Stefania Minardi) 〈2013-02-14〉
Abstract: We propose a decision rule — a procedure that maps incomplete judgements of an agent into final choices — that allows us to link confidence in decision-making under uncertainty to the ambiguity attitude displayed in the choice behavior. If this decision rule is applied to an affine graded preference relation (Minardi and Savochkin, 2013), the emerging choice behavior exhibits sensitivity to ambiguity and it is consistent with the generalized Hurwicz α-pessimism model studied by Ghirardato, Maccheroni, and Marinacci (2004); its famous special case of maxmin preferences of Gilboa and Schmeidler (1989) is obtained by imposing certain additional assumptions. We provide two comparative statics results: First, if the level of tolerance for the lack of confidence in comparisons decreases, the agent becomes more ambiguity averse. Second, a more decisive decision maker displays less ambiguity aversion.
“Dynamically Stable Preferences” (with Anna Gumen), Journal of Economic Theory, 2013, vol. 148, pp. 1487–1508
Abstract: In the framework of dynamic choice under uncertainty, we define dynamic stability as a combination of two assumptions prevalent in the literature: dynamic consistency and the requirement that updated preferences have the same “structure” as ex ante ones. Dynamic stability also turns out to be a defining characteristic of the multiplier preferences of Hansen and Sargent (2001) within the scope of variational preferences. Generally, for any class of invariant preferences, dynamic stability is shown to be connected to another independent property — consequentialism.
“Characterizations of Smooth Ambiguity Based on Continuous and Discrete Data” (with Stefania Minardi), Mathematics of Operations Research, 2017, vol. 42(1), pp. 167–178
This paper is an expanded version of an earlier work circulated under the title “A Functional Characterization of Smooth Ambiguity.”
Abstract: In the Anscombe-Aumann setup, we provide conditions for a collection of observations to be consistent with a well-known class of smooth ambiguity preferences (Klibanoff, Marinacci, Mukerji, 2005). Each observation is assumed to take the form of an equivalence between an uncertain act and a certain outcome. We provide three results that describe these conditions for data sets of different cardinality. Our findings uncover surprising links between the smooth ambiguity model and classic mathematical results in complex and functional analysis.