Different people think in different ways, and their behaviour can be analysed in different ways. In this paper, we analyse the correlation between the type of behaviour and the time taken to reach a decision in a dynamic context and under ambiguity with different monetary incentives, linking the results with fast and slow thinking processes. Four different types of dynamic decision-makers are identified: Resolute, Myopic, Sophisticated, and Expected Utility (EU). The different types use different methods to solve dynamic problems: A Resolute decision-maker (DM) decides right at the beginning his or her strategy, a Myopic DM simplifies the problem by ignoring part of it, a Sophisticated DM works by backward induction, and an EU DM either works by backward induction or by using the Strategy Method. We use data from (Caferra et al., 2023) where subjects were asked to solve a two-stage dynamic allocation problem. In that experiment, there were two treatments, incentivised and unincentivised. We found that their type matters: EU subjects take more time to solve the ambiguity, showing a relationship between dynamic consistency and ambiguity-neutrality with a deliberative thinking process. We also found that subjects in the non-incentivised treatment take less time, indicating that monetary incentives matter. The gap between the probabilities at each stage appears to be a good predictor of uncertainty for uncertainty averse subjects: the higher is the gap, the clearer is the most probable event and the lower is the time subjects spend to solve the decision problem.

This paper builds on the data from a published paper on behaviour under ambiguity (Conte & Hey, 2013 )—henceforth C&H—to explore the determinants of decision time . C&H categorized individual subjects as being of one of four types (of decision-maker)—Expected Utility, Smooth Ambiguity, Rank Dependent and Alpha Expected Utility—by using the decisions of the subjects, but did not look at the decision times of the different types. We take as given the categorization identified by C&H, and explore whether the classification can explain the decision times of the subjects. We investigate whether and why different types take a different amount of time to decide. We explore the effects of various features related to (mainly psychological) theories of the process of decision-making—i.e., experience with the task, complexity, closeness to indifference and similarity of the options. Our results show that different types take a similar time to make their decisions on average, but decision times of different types are explained by different features of the decision task. This paper is the first investigating the heterogeneity of decision times based on a classification of subjects into different types in an ambiguous (rather than risky) decision context.

This paper experimentally investigates the potential existence of dynamically inconsistent individuals in a situation of ambiguity. The experiment involves participants making two sequential decisions concerning the allocation of a sum of money, with an ambiguous move by Nature occurring after first decision, and again after the second. We conducted two between-subject sessions: one incentivised and one unincentivised. By analysing the resulting data, we are able to classify participants into four distinct decision-making types: Myopic, Resolute, Sophisticated and Expected Utility (EU). Our results suggest that a significant proportion of the participants do not exhibit dynamic inconsistency being either Resolute, Sophisticated or EU. We discuss how monetary incentives can change the dynamic consistency of decision-makers and the salience of the Ambiguity. Differently from the incentivised treatment, we detect a slight increase of the proportion of Myopic behaviour in the hypothetical case, suspecting that incentives might affect dynamic consistency. A noteworthy observation is that, in the majority of cases, ambiguity tends to simplify to risk in the absence of monetary incentives. These findings have implications for economic decision-making and policymaking. By identifying the different types of decision-makers and understanding how they make choices, we can develop more effective strategies to promote desirable outcomes.

The Lucas tree model [Lucas RE Jr (1978) Asset prices in an exchange economy. Econometrica 46(6):1429–1445.] lies at the heart of modern macrofinance. At its core, it provides an analysis of the equilibrium price of a long-lived asset in an exchange economy where consumption is the objective and the sole purpose of the asset is to smooth consumption through time. Experimental tests of the model use a particular instantiation of the Lucas model. Here we adopt a different instantiation to the first two, extending their analyses from a two-period oscillating world to a three-period cyclical world; this is partly to test the robustness of their results. We also go one step further and compare this solution (to a consumption-smoothing problem), in which consumption claims are traded via the long-lived asset, with the alternative solution provided by a market, in which agents can directly trade (short-lived) consumption claims between periods. We find that the latter exchange economy is more efficient in encouraging consumption smoothing than the economy with the long-lived asset. We find evidence of uncompetitive trading in both markets. This paper was accepted by Yan Chen, decision analysis.

Search and switching costs are two market frictions that are well known in the literature for preventing people from switching to a new and cheaper provider. Previous experimental literature has studied these two frictions in isolation. However, field evidence shows that these two frictions frequently occur together. Recently, a theoretical framework has been developed (Wilson in Eur Econ Rev 56(6):1070–1086) which studies the interplay between these two costs. We report on an experiment testing this theory to see if individual behaviour with search and switching costs is in line with the theoretical predictions derived from the optimal choice rule of Wilson. The results show the crucial role of the search strategy: not only, according to Wilson model, the search cost has a greater deterrent impact on search than the switching costs, but also the sub-optimality of the search strategy is the major source of sub-optimality in the switching behaviour.

This paper reports on an experimental test of the acceptability of the Principle of Accountability. This is a principle of social justice, and states, “individuals should be rewarded for factors under their control […], but not for factors outside their control” (Cappelen and Tungodden (2009)). We specifically ask for acceptability of the principle underlying it, rather than for particular rewards in particular instances. We carry out the test with both an Internal and an External Dictator, conducting a laboratory experiment with a total of 240 subjects. We find that there is broad, but not overwhelming support for the Principle. When the Principle is internally inconsistent no clear preference emerges, which is not surprising.

When people take decisions under risk, it is not only the expected utility that is important, but also the shape of the distribution of utility: clearly the dispersion is important, but also the skewness. For given mean and dispersion, decision-makers treat positively and negatively skewed prospects differently. This paper presents a new behaviourally-inspired model for decision making under risk, incorporating both dispersion and skewness. We run a horse-race of this new model against six other models of decision-making under risk and show that it outperforms many in terms of goodness of fit and shows a reasonable performance in predictive ability. It can incorporate the prominent anomalies of standard theory such as the Allais paradox, the valuation gap, and preference reversals, and also the behavioural patterns observed in experiments that cannot be explained by Rank Dependent Utility Theory.

We report on an experimental investigation of the emergence of Spontaneous Order, the idea that societies can co-ordinate, without government intervention, on a form of society that is good for its citizens, as described by Adam Smith. Our experimental design is based on a production game with a convex input provision possibility frontier, where subjects have to choose a point on this frontier. We start with a simple society consisting of just two people, two inputs, one final good and in which the production process exhibits returns to specialisation. We then study more complex societies by increasing the size of the society (groups of 6 and 9 subjects) and the number of inputs (6 and 9 inputs respectively), as well as the combinations of inputs that each subject can provide. This form of production can be characterised as a cooperative game, where the Nash equilibrium predicts that the optimal outcome is achieved when each member of this society specialises in the provision of a single input. Based on this framework, we investigate whether Spontaneous Order can emerge, without it being imposed by the government. We find strong evidence in favour of the emergence of Spontaneous Order, with communication being an important factor. Using text classification algorithms (Multinomial Naive Bayes) we quantitatively analyse the available chat data and we provide insight into the kind of communication that fosters specialisation in the absence of external involvement. We note that, while communication has been shown to foster coordination in other contexts (for example, in public goods games, market entry games and competitive coordination games) this contribution is in the context of a production game where specialisation is crucial.

The term 'preference imprecision' seems to have different meanings to different people. In the literature, one can find references to a number of expressions. For example: vagueness, incompleteness, randomness, unsureness, indecisiveness and thick indifference curves. Some of these are theoretical constructs, some are empirical. The purpose of this paper is to survey the various different approaches and to try to link them together: to see if they are all addressed to the same issue, and to come to some conclusions. In the course of this survey, we report on evidence concerning the existence of preference imprecision, and its impact on theoretical and empirical work.

Eliciting the level of risk aversion of experimental subjects is of crucial concern to experimenters. In the literature there are a variety of methods used for such elicitation; the concern of the experiment reported in this paper is to compare them. The methods we investigate are the following: Holt-Laury price lists; pairwise choices, the Becker-DeGroot-Marschak method; allocation questions. Clearly their relative efficiency in measuring risk aversion depends upon the numbers of questions asked; but the method itself may well influence the estimated risk-aversion. While it is impossible to determine a 'best' method (as the truth is unknown) we can look at the differences between the different methods. We carried out an experiment in four parts, corresponding to the four different methods, with 96 subjects. In analysing the data our methodology involves fitting preference functionals; we use four, Expected Utility and Rank-Dependent Expected Utility, each combined with either a CRRA or a CARA utility function. Our results show that the inferred level of risk aversion is more sensitive to the elicitation method than to the assumed-true preference functional. Experimenters should worry most about context.

Eliciting the level of risk aversion of experimental subjects is of crucial concern to experimenters. In the literature there are a variety of methods used for such elicitation; the concern of the experiment reported in this paper is to compare them. The methods we investigate are the following: Holt–Laury price lists; pairwise choices, the Becker–DeGroot–Marschak method; allocation questions. Clearly their relative efficiency in measuring risk aversion depends upon the numbers of questions asked; but the method itself may well influence the estimated risk-aversion. While it is impossible to determine a ‘best’ method (as the truth is unknown) we can look at the differences between the different methods. We carried out an experiment in four parts, corresponding to the four different methods, with 96 subjects. In analysing the data our methodology involves fitting preference functionals; we use four, Expected Utility and Rank-Dependent Expected Utility, each combined with either a CRRA or a CARA utility function. Our results show that the inferred level of risk aversion is more sensitive to the elicitation method than to the assumed-true preference functional. Experimenters should worry most about context.

This paper is about behaviour under ambiguity—that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a ‘state of the world’ with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α-MEU.

This paper is about satisficing behaviour. Rather tautologically, this is when decision-makers are satisfied with achieving some objective, rather than in obtaining the best outcome. The term was coined by Simon (Q J Econ 69:99–118, 1955 ), and has stimulated many discussions and theories. Prominent amongst these theories are models of incomplete preferences, models of behaviour under ambiguity, theories of rational inattention, and search theories. Most of these, however, seem to lack an answer to at least one of two key questions: when should the decision-maker (DM) satisfice; and how should the DM satisfice. In a sense, search models answer the latter question (in that the theory tells the DM when to stop searching), but not the former; moreover, usually the question as to whether any search at all is justified is left to a footnote. A recent paper by Manski (Theory Decis. doi: 10.1007/s11238-017-9592-1 , 2017 ) fills the gaps in the literature and answers the questions: when and how to satisfice? He achieves this by setting the decision problem in an ambiguous situation (so that probabilities do not exist, and many preference functionals can therefore not be applied) and by using the Minimax Regret criterion as the preference functional. The results are simple and intuitive. This paper reports on an experimental test of his theory. The results show that some of his propositions (those relating to the ‘how’) appear to be empirically valid while others (those relating to the ‘when’) are less so.

Inspired by Clower’s conjecture that the necessity of trading through money in monetised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemployment, we experimentally investigate behaviour in markets where trading has to be done through money. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in markets without money, where money cannot intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction , where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house , where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of non-monetised/monetised trading with double auction/clearing house. We find that: convergence is faster under non-monetised trading, implying that the necessity of using money to facilitate trade hinders convergence; that monetised trading is noisier than non-monetised trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. As far as efficiency is concerned, monetised trading lowers both informational and allocational efficiency, and while the double auction outperforms the clearing house in terms of allocational efficiency, the clearing house is marginally better than the double auction in terms of informational efficiency when trade is through money. Crucially we confirm the conjecture that inspired these experiments: that the necessity to use money in trading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.

This article presents a new model for decision-making under risk, which provides an explanation for empirically-observed preference reversals. Central to the theory is the incorporation of probability perception imprecision, which arises because of individuals' vague understanding of numerical probabilities. We combine this concept with the use of the Alpha EU model and construct a simple model which helps us to understand anomalies, such as preference reversals and valuation gaps, discovered in the experimental economics literature, that standard models cannot explain.

“I am fortunate to have many co-authors, most of whom have inspired and encouraged me. Those who have worked with me on experiments include (and I hope that I have not omitted any) Louise Allsopp, David Ansic, Marie-Edith Bissey, John Bone, Roberto Burlando, David Butler, Enrica Carbone, Anna Conte, Valentino Dardanoni, Daniela Di Cagno, Xueqi Dong,Mariateresa Fiocca, Konstantinos Georgalos, Ricardo Goncalves, Jinkwon Lee, Gianna Lotito, Julia Knoll, Anna Maffioletti, Konstantina Mari, Peter Moffat, Andrea Morone, Tibor Neugebauer, Chris Orme, Stefania Ottone, Noemi Pace, Luca Pannacione, Carmen Pasca, Massimo Paradiso, Cristina Pitassi, Martin Reynolds, Karim Sadrieh, Patrizia Sbriglia, Ulli Schmidt, Elisabetta Strazzera, JohnSuckling andWentingZhou.My thanks to all of them.And, once again,my thanks to the organisers of this special issue.”

This paper represents an intersection between two lines of research. The first is portfolio choice theory, which underlies much of finance; the second is the elicitation of preferences under uncertainty. The theory of the behaviour of financial markets builds heavily on portfolio choice theory; until recently this has assumed that preferences are of a particularly simple kind. In contrast research on preferences has revealed that people have more sophisticated preferences. This paper tries to bring the two fields together by investigating, in a portfolio choice context, the preferences that are revealed by decisions. In the second of these two fields, researchers are increasingly using allocation problems to elicit the preferences of subjects, believing that such problems are more informative, and perhaps more natural, than other elicitation methods. At the same time portfolio choice theory is itself concerned with an allocation problem. Usually in experimental finance the allocation problems are over Arrow securities each of which pays off only in one state of the world. Instead we study the more realistic case, familiar from finance, in which all assets pay off in all states of the world. To make our study more realistic we frame the problem as one under ambiguity, where the probabilities of the states are not known to the decision-maker. This enables us to compare the performance of some recent theories of behaviour under ambiguity as well as traditional ones (such as Mean-Variance) from the theory of finance. We also identify a ‘rule of thumb’ that decision-makers may be using in this rather complex scenario. This research may help us to understand more fully actual portfolio choice decisions.