Choices under Uncertainty

California Institute Of Technology, Pasadena CA

Investigators

Abstract

Choices under Uncertainty When people make decisions under uncertainty, they often choose without knowing the full consequences of their actions. Decisions under uncertainty are a basic feature of life and of the human experience. The PIs seek to understand how such decisions are made in the context of financial markets. Understanding financial decisions will shed light on how individuals make choices under uncertainty and aid our understanding of financial markets and models. This can help us uncover, for example, the causes of financial crisis. The proposed research carries out a set of novel experiments on decisions under uncertainty in financial settings. The most fundamental theory of decisions under uncertainty is subjective expected utility (SEU). Its use is ubiquitous is economics, and other social sciences. The PIs propose a new experimental and empirical approach to testing SEU and its generalizations: state dependent expected utility (SDU), and maxmin expected utility (MEU). The proposed research seeks to elucidate the applicability and scope of the most important theories of choice under uncertainty in a financial market environment. Such environments have been, and continue to be, the focus of academic research in economics, and the general interest of the public. It is crucial to further our understanding of financial market that we understand the applicability of the most commonly-used theories of individual choice in such markets. The new approach contains two key innovations: 1) it provides non-parametric revealed preference tests, allowing for a test of the theory that does not rest on particular parametric assumptions; and 2) it assumes an environment of financial decision making under uncertainty.