EURO 2024 Copenhagen
Abstract Submission

EURO-Online login

339. Robust determination of certainty equivalents

Invited abstract in session WA-7: Behaviour and decision processes , stream Behavioural OR.

Wednesday, 8:30-10:00
Room: 1019 (building: 202)

Authors (first author is the speaker)

1. Bernhard Nietert
Finance and Banking, Philipps Universitaet Marburg

Abstract

Certainty equivalents are a core concept in Finance/Economics. Nevertheless, their experimental detection as outlined in papers like Holt/Laury (2002) and ensuing publications is not robust and not reliable enough given its role as a core concept: it consists of a one-off choice between a risky lottery and a riskless payoff and does not consider further conditions that might exert influence.
For that reason, this paper uses on the one hand the PEST procedure advocated by Luce. PEST analyzes repeated (and not just one-off) choices and determines certainty equivalents from the steady state, i.e., when decision makers no longer switch between the riskless payoff and the risky lottery. On the other hand, conditions are specified as: (i) expected value is given as additional in-formation next to the state-dependent outcomes of the risky lottery; (ii) different starting values of the riskless payoff in PEST.
This paper finds:
(i) The condition “expected value” leads to higher average reaction times and requires more trials in the PEST procedure compared to the benchmark case “only state-dependent outcomes”.
(ii) The starting value of the riskless payoff in the PEST procedure exerts massive influence on certainty equivalents.
(iii) The number of fixation points (derived from eye tracking) and reactions times can (partially) explain why conditions influence certainty equivalents.

Keywords

Status: accepted

Back to the list of papers