Estimation of Risk and Time Preferences: Response Error, Heterogeneity, Adaptive Questionnaires, and Experimental Evidence from Mortgagers

35 Pages Posted: 9 Aug 2010

See all articles by Olivier Toubia

Olivier Toubia

Columbia Business School - Marketing

Eric J. Johnson

Columbia Business School - Marketing

Theodoros Evgeniou

INSEAD

Philippe Delquié

George Washington University - School of Business

Date Written: July 30, 2010

Abstract

We develop a methodology for the measurement of the parameters of cumulative prospect theory and time discounting models based on tools from the preference measurement literature. These parameters are typically elicited by presenting decision makers with a series of choices between hypothetical alternatives, gambles or delayed payments. We present a method for adaptively designing the sets of hypothetical choices presented to decision makers, and a method for estimating the preference function parameters which capture interdependence across decision makers as well as response error. We apply our questionnaire design and estimation methods to a study of the characteristics of homeowners who owe more on their mortgage than the current value of the underlying real estate asset. Our estimates indicate that such homeowners have larger discount rates and present bias than others, but do not differ in their risk preferences.

Keywords: Prospect Theory, Time Discounting, Bayesian Statistics, Adaptive Experimental Design, Revealed Preference

Suggested Citation

Toubia, Olivier and Johnson, Eric J. and Evgeniou, Theodoros and Delquié, Philippe, Estimation of Risk and Time Preferences: Response Error, Heterogeneity, Adaptive Questionnaires, and Experimental Evidence from Mortgagers (July 30, 2010). INSEAD Working Paper No. 2010/52/DS/TOM. Available at SSRN: https://ssrn.com/abstract=1655775 or http://dx.doi.org/10.2139/ssrn.1655775

Olivier Toubia (Contact Author)

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Eric J. Johnson

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Theodoros Evgeniou

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Philippe Delquié

George Washington University - School of Business ( email )

Washington, DC 20052
United States

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