Social Exclusion, Ambiguity and (IR)rationality

Abstract

This working paper extends the methodology of non-smooth affective portfolio theory (APT) for eliciting (IR)rational preferences of investors endowed with continuous quasilinear utility functions, where assets are portfolios of risky and ambiguous state-contingent claims. The elicitation is a solution of the affective Afriat inequalities. Solving the smooth affective Afriat inequalities is Np-hard. The proposed extension is a methodology for the elicitation of (IR)rational preferences of individuals endowed with random continuous quasilinear utility functions defined over finite subsets of discrete social goods as a refutable model of social exclusion in the incomplete markets for social goods. The methods of elicitation are generalized estimating equations (GEE) and alternating logistic regression (ALR).

Keywords: Rationality, Behavioral Finance, Well Being

JEL Classification: D91, G41, I31