Flexible Approximation of Subjective Expectations Using Probability Questions: An Application to the Investment Game
41 Pages Posted: 17 Oct 2007 Last revised: 20 Apr 2023
Abstract
We use spline interpolation to approximate the subjective cumulative distribution function of an economic agent over the future realization of a continuous (possibly censored) random variable. The method proposed exploits information collected using a small number of probability questions on expectations and requires a weak prior knowledge of the shape of the underlying distribution. We find that eliciting 4 or 5 points on the cumulative distribution function of an agent is sufficient to accurately approximate a wide variety of underlying distributions. We show that estimated moments of general functions of the random variable can be computed analytically and/or using standard simulation techniques. We illustrate the usefulness of the method by estimating a simple model to asses the impact of expectations on investment decisions in a commonly used trust game.
Keywords: decision making under uncertainty, approximation of subjective expectations, spline interpolation
JEL Classification: C81, C10, D39
Suggested Citation: Suggested Citation
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