Choice under uncertainty and behavioural economics

• Main Author: Gee, C.
• Published: University of Cambridge 2010
• Subjects: 330.015195
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.599346

This dissertation comprises three chapters on the question of how individuals make choices in situations of uncertainty. In chapter 1 we develop an axiomatic model of choice in which the decision-maker acts on the anticipation of regret. Our representation is analogous to a representation from classic regret theory but we consider transitive preferences over act profiles rather than intransitive preferences over single acts. We consider the behavioural implications of our theory, in particular the decision-maker’s attitude to statewise dominated acts, the responsibility of choice and choice bracketing. We derive 2 measures of regret aversion and show our theory can account for why individuals may display risk averse behaviour in one situation whilst displaying risk-loving behaviour in another. In chapter 2 we present a model in which a risk-neutral monopolist designs a lottery and sells a ticket to a regret averse consumer. We show that, because he pays disproportionate attention to states in which there are large outcome differences across acts, the regret averse consumer may display a preference for a long shot bet that has a negative expected value. For a general preference specification we determine the lottery contract that maximises expected revenue for the monopolist and we derive conditions under which the lottery is neither trivial nor unrealistic. In chapter 3 we use data from the popular television game-show “Deal or No Deal?” to analyse the way individuals make choices under risk. We present a formal game-theoretical model of the show in which both contestant and banker are modelled as strategic players. We investigate the properties of the equilibrium solution to form hypotheses of how rational expected utility-maximisers would behave as players in the game and test these hypotheses with the relevant choice data. The main result is that an increasing offer function is the result of optimal behaviour when the banker is uncertain about the contestant’s risk attitudes.