Testing theories of financial decision making

Creators: Chambers, Christopher P.; Echenique, Federico; Saito, Kota

Abstract

We describe the observable content of some of the most widely used models of decision under uncertainty: models of translation invariant preferences. In particular, we characterize the models of variational, maxmin, constant absolute risk aversion, and constant relative risk aversion utilities. In each case we present a revealed preference axiom that is satisfied by a dataset if and only if the dataset is consistent with the corresponding utility representation. We test our axioms using data from an experiment on financial decisions.

Additional Information

© 2016 National Academy of Sciences. Edited by Matthew O. Jackson, Stanford University, Stanford, CA, and approved February 22, 2016 (received for review September 8, 2015). Published online before print March 28, 2016. We thank Simon Grant and Massimo Marinacci, who posed questions to us that led to some of the results in this paper. We also thank John Hey and Noemi Pace for allowing us to use their data and Taisuke Imai for carrying out our test. This work was supported by National Science Foundation Grant SES-1426867 (to C.P.C.). Author contributions: C.P.C., F.E., and K.S. designed research, performed research, analyzed data, and wrote the paper. The authors declare no conflict of interest. This article is a PNAS Direct Submission.

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