Pietro Ortoleva

Stochastic Choice and Preferences for Randomization

We conduct an experiment in which subjects face the same questions repeated multiple times, with repetitions of two types: (1) following the literature, the repetitions are distant from each other; (2) in a novel treatment, the repetitions are in a row, and subjects are told that the questions will be repeated. We find that a large majority of subjects exhibit stochastic choice in both cases. We discuss the implications for models of stochastic choice.

Is it All Connected? A Testing Ground for Unified Theories of Behavioral Economics Phenomena

We estimate 11 well-studied behavioral phenomena in a group of 190 laboratory subjects (short-term discount rates, small stakes risk aversion, present bias, loss aversion, the endowment effect, aversion to ambiguity and compound lotteries, the common ratio and common consequence effects and sender/receiver behavior in trust games). We study the joint distribution of these behaviors and compare it to the predictions of existing models as a step in the development of a parsimonious, general model of economic choice. We find strong correlations between loss aversion and the endowment effect, and between probability weighting (as measured by the common ratio and common consequence effects) and risk aversion, in line with Cumulative Prospect Theory (CPT). We also find risk aversion to be related to ambiguity aversion, compound lottery aversion and discounting, consistent with the curvature of the utility function being an important determinant of all three behaviors. However, we do not find evidence that probability weighting in the risk domain is related to ambiguity and compound lottery aversion or present bias (as implied by recent extensions to CPT). Behavior in the trust game is unrelated to attitudes to risk or uncertainty. We find little relation between intelligence or personality measures and economic behavior, although we do find overconfidence to be negatively related to many behaviors (particularly ambiguity aversion) and women to be much more loss averse than men.

Pathos & ethos: emotions and willingness to pay for tobacco products

In this article we use data from a multi-country Randomized Control Trial study on the effect of anti-tobacco pictorial warnings on an individual’s emotions and behavior. By exploiting the exogenous variations of images as an instrument, we are able to identify the effect of emotional responses. We use a range of outcome variables, from cognitive (risk perception and depth of processing) to behavioural (willingness to buy and willingness to pay). Our findings suggest that the odds of buying a tobacco product can be reduced by 80% if the negative affect elicited by the images increases by one standard deviation. More importantly from a public policy perspective, not all emotions behave alike, as eliciting shame, anger, or distress proves more effective in reducing smoking than fear and disgust. JEL Classification C26, C99, D03, I18 PsycINFO classification 2360; 3920

The Behavior of Other as a Reference Point

We use prospect theory to model reference dependent consumers, where the reference point is the average behavior of the society in the current period. We show that after a finite number of steps under any equilibrium, the distribution of wealth will become and remain equal, or admit a missing class (a particular form of polarization). Under equilibria that admit the highest growth rates, the initial wealth distribution that maximizes this growth rate is one of perfect equality. Conversely, under equilibria that admit the lowest growth rates, perfect equality minimizes this growth rate and societies with a small level of initial inequality grow the fastest. In addition growth rates in corresponding economics without reference dependent consumers admit lower growth rates.

Allais, Ellsberg, and Preferences for Hedging

Two of the most well-known regularities observed in preferences under risk and uncertainty are ambiguity aversion and the Allais paradox. We study the behavior of an agent who can display both tendencies simultaneously. We introduce a novel notion of preference for hedging that applies to both objective lotteries and uncertain acts. We show that this axiom, together with other standard ones, is equivalent to a representation in which the agent 1) evaluates ambiguity using multiple priors, as in the model of Gilboa and Schmeidler [1989] and 2) evaluates objective lotteries by distorting probabilities, as in the Rank Dependent Utility model, but using the worst from a set of distortions. We show that a preference for hedging is not sufficient to guarantee Ellsberg-like behavior if the agent violates Expected Utility for objective lotteries; we provide a novel axiom that characterizes this case, linking the distortions for objective and subjective bets

A Variation on Ellsberg

Ellsbergs experiment involved a gamble with no ambiguity (N) and a gam- ble where the prize that could be won is objectively known, but the winning probability depends on the (ambiguous) urns composition (P). We extend this by including a gamble where the winning probability is objectively known, but the prize depends on the urns composition (C), and also gambles where both the probability and the prize depend on the urns composition, and can either be correlated positively (D) or negatively (M). Among transitive subjects who prefer N to P, 40% prefer D to N, 74% prefer D to P, 97% prefer D to M, and the modal ranking (about 39%) satis es D

Time Lotteries: Online Appendix

We study preferences over lotteries that pay a specific prize at uncertain future dates: time lotteries. The standard model of time preferences, Expected Discounted Utility (EDU), implies that individuals must be risk seeking in this case. As a motivation, we show in an incentivized experiment that most subjects exhibit the opposite behavior, i.e., they are risk averse over time lotteries (RATL). We then make two theoretical contributions. First, we show that RATL can be captured by a generalization of EDU that is obtained by keeping the postulates of Discounted Utility and Expected Utility. Second, we introduce a new property termed Stochastic Impatience, a risky counterpart of standard Impatience, and show that not only the model above, but also substantial generalizations that allow for non-Expected Utility and non-exponential discounting, cannot jointly accommodate it and RATL, showing a fundamental tension between the two.