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Abstract:
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The most popular models of decision making use a single criteria to evaluate
projects or lotteries. However, decision makers may actually consider multiple
criteria when evaluating projects. We consider a dual criteria model from psychology.
This model integrates the familiar tradeoffs between risk and utility that economists
traditionally assume, allowance for rank-dependent decision weights, and
consideration of income thresholds. We examine the issues involved in full
maximum likelihood estimation of the model using observed choice data. We
propose a general method for integrating the multiple criteria, using the logic of
mixture models, which we believe is attractive from a decision-theoretic and
statistical perspective. The model is applied to observed choices from a major natural
experiment involving intrinsically dynamic choices over highly skewed outcomes.
The evidence points to the clear role that income thresholds play in such decision
making, but does not rule out a role for tradeoffs between risk and utility or
probability weighting. |
This work is licensed under a Creative Commons License.
