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Estimation of risk and time preferences: response error, heterogeneity, adaptive questionnaires, and experimental evidence from mortgagers

Author: Toubia, Olivier ; Johnson, Eric ; Evgeniou, Theodoros ; Delquié, PhilippeINSEAD Area: Decision Sciences Series: Working Paper ; 2010/52/DS Publisher: Fontainebleau : INSEAD, 2010.Language: EnglishDescription: 37 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: We develop a methodology for the measurement of the parameters of cumulative prospect theory and time discounting models based on tools from the preference measurement litera-ture. These parameters are typically elicited by presenting decision makers with a series of choices between hypothetical alternatives, gambles or delayed payments. We present a method for adaptively designing the sets of hypothetical choices presented to decision mak-ers, and a method for estimating the preference function parameters which capture interde-pendence across decision makers as well as response error. We apply our questionnaire de-sign and estimation methods to a study of the characteristics of homeowners who owe more on their mortgage than the current value of the underlying real estate asset. Our estimates in-dicate that such homeowners have larger discount rates and present bias than others, but do not differ in their risk preferences.
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We develop a methodology for the measurement of the parameters of cumulative prospect theory and time discounting models based on tools from the preference measurement litera-ture. These parameters are typically elicited by presenting decision makers with a series of choices between hypothetical alternatives, gambles or delayed payments. We present a method for adaptively designing the sets of hypothetical choices presented to decision mak-ers, and a method for estimating the preference function parameters which capture interde-pendence across decision makers as well as response error. We apply our questionnaire de-sign and estimation methods to a study of the characteristics of homeowners who owe more on their mortgage than the current value of the underlying real estate asset. Our estimates in-dicate that such homeowners have larger discount rates and present bias than others, but do not differ in their risk preferences.

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