Dr. Thomas Sproul, Dept. of Environmental & Natural Resource Economics, University of Rhode Island will present "Measurement Error in Prospect Theory Field Elicitations"

Posted on Monday, March 05, 2018

Dr. Thomas Sproul, Dept. of Environmental & Natural Resource Economics, University of Rhode Island, will present  "Measurement Error in Prospect Theory Field Elicitations", on Friday, March 16th, 10:30-11:30 am, in Room 106 ROZH. 

Abstract

Following the 2014 Agricultural Act, the U.S. farm safety net consists primarily of subsidized insurance products. Consequently, effective policy modeling relies critically on understanding farmer risk preferences, and how they are distributed in the population. Widely cited efforts to standardize preference elicitations in the field are found in Tanaka, Camerer and Nguyen (2010) and Liu (2013). These papers extend the menu-based approach of Holt and Laury (2002) to estimate parameters of a prospect theory value function (Kahneman and Tversky, 1992) and probability weighting (Prelec, 1998). Their approach relies on exact identification – one menu per parameter estimated – which effectively ignores the possibility of choice errors by subjects (as identified by Jacobson and Petrie, 2009, and Bruhin, Fehr-Duda and Epper, 2010, among others). As a result, subsequent regression estimates based on these elicitations will suffer from attenuation bias. Using a combination of numerical simulations and new experimental elicitation data, we quantify these estimation errors and recommend refinements to the elicitation procedure for future applied research. We show that, in some cases, estimation error can be dramatically reduced simply by including a second set of similar menus. However, menu design is not a solved problem and we outline areas for future research.

All are welcome to attend.