On the Existence and Interpretation of the "Unit Root" in U.S. Gnp

15 Pages Posted: 14 Jan 2001

See all articles by J. Bradford DeLong

J. Bradford DeLong

University of California, Berkeley; Federal Reserve Bank of San Francisco; National Bureau of Economic Research (NBER)

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: September 1988

Abstract

In this paper, we assess the degree to which four of the most commonly used models of risky decision making can explain the choices individuals make when faced with risky prospects. To make this assessment, we use experimental evidence for two random samples of young adults. Using a robust, nonlinear least squares procedure, we estimate a model that is general enough to approximate Kahnenman and Tversky's prospect theory and that for certain parametric values will yield the expected utility model, a subjective expected utility model and a probability-transform model. We find that the four models considered explain the decision-making behavior of the majority of our subjects. Surprisingly, we find that the choice behavior of the largest number of subjects is consistent with a probability-transform model. Such models have only been developed recently and have not been used in applied settings. We find least support for the expected utility model -- the most widely used model of risky decision making.

Suggested Citation

DeLong, James Bradford and Summers, Lawrence H., On the Existence and Interpretation of the "Unit Root" in U.S. Gnp (September 1988). NBER Working Paper No. w2716. Available at SSRN: https://ssrn.com/abstract=255326

James Bradford DeLong (Contact Author)

University of California, Berkeley ( email )

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Lawrence H. Summers

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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