Robert Sugden

Reciprocity: The Supply of Public Goods through Voluntary Contributions

In modern economies, there are two main ways of financing the production of goods and services. One way is by charging consumers: if you consume, you must pay. The other way is by raising taxes: whether you consume or not, you must pay. But there is also a third way, characteristic of what I shall call the voluntary sector, which is to finance production out of voluntary contributions: whether you consume or not, you choose for yourself whether you pay. There can be no doubt that this third method does sometimes work. In the United Kingdom, for example, the lifeboat service is financed by voluntary contributions and the blood transfusion service is dependent on unpaid donors. Much medical research is funded by gifts; many theatres, orchestras and sports clubs are able to continue only through the success of their fund-raising appeals; trade unions manage to exist where there is no compulsion on anyone to join. This is an economic phenomenon that needs to be explained. In this paper I shall propose a theory of the voluntary sector, based on the assumption that most people believe free riding to be morally wrong.

A Theory of Focal Points

The paper presents a theoretical framework that distinguishes between the strategic structure of a game (the existential game) and the way the players describe the game to themselves. Each player works with a private description of the game in which strategies are identified by labels; labels are generated by a stochastic labeling procedure. Each player chooses a decision rule which, for each possible private description, picks one of the available strategy labels. A criterion of collective rationality is applied to choices among decision rules. The implications of collective rationality are explored for a range of games with different labeling procedures. Copyright 1995 by Royal Economic Society.

Some implications of a more general form of regret theory

Abstract Regret theory entails the possibility of non-transitive pairwise choices. It therefore raises questions about how individuals choose from sets of more than two actions, especially when there exists a subset of pairs of actions over which preferences cycle. A generalization of regret theory is suggested and is compared and contrasted with Fishburns generalization of SSB utility theory. It is also shown that under this generalization an individual with non-transitive pairwise preferences with not be caught in a never-ending cycle and is not vulnerable to being “money-pumped” into bankruptcy.

Incorporating a stochastic element into decision theories

Abstract Recent papers by Harless and Camerer (1994) and Hey and Orme (1994) have employed two rather different models of errors in decision making under uncertainty. The present paper develops a third approach and shows how different stochastic specifications of the same deterministic ‘core’ theory may generate very different (and sometimes surprising) hypotheses.

On Nudging: A Review of Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H. Thaler and Cass R. Sunstein

Abstract This paper reviews the case for libertarian paternalism presented by Thaler and Sunstein in Nudge. Thaler and Sunstein argue that individuals’ preferences are often incoherent, making paternalism is unavoidable; however, paternalistic interventions should ‘nudge’ individuals without restricting their choices, and should nudge them towards what they would have chosen had they not been subject to specific limitations of rationality. I argue that the latter criterion provides inadequate guidance to nudgers. It is inescapably normative, and so allows nudgers’ conceptions of well‐being to override those of nudgees. Even if nudgees’ rationality were unbounded, their revealed preferences might still be incoherent.

Reference-dependent subjective expected utility

Abstract A reference-dependent generalisation of subjective expected utility theory is presented. In this theory, preferences between acts depend both on final outcomes and on reference points (which may be uncertain acts). It is characterised by a set of axioms in a Savage-style framework. A restricted form of the theory separates attitudes to end states (encoded in a ‘satisfaction function’) from attitudes to gains and losses of satisfaction. Given weak additional assumptions, the restricted theory excludes cycles of choice, explains observed disparities between willingness-to-pay and willingness-to-accept valuations of lotteries, and predicts preference reversal.

Experimental Economics: Rethinking the Rules

Since the 1980s, there has been explosive growth in the use of experimental methods in economics, leading to exciting developments in economic theory and policy. Despite this, the status of experimental economics remains controversial. In Experimental Economics, the authors draw on their experience and expertise in experimental economics, economic theory, the methodology of economics, philosophy of science, and the econometrics of experimental data to offer a balanced and integrated look at the nature and reliability of claims based on experimental research. The authors explore the history of experiments in economics, provide examples of different types of experiments, and show that the growing use of experimental methods is transforming economics into a genuinely empirical science. They explain that progress is being held back by an uncritical acceptance of folk wisdom regarding how experiments should be conducted, a failure to acknowledge that different objectives call for different approaches to experimental design, and a misplaced assumption that principles of good practice in theoretical modeling can be transferred directly to experimental design. Experimental Economics debates how such limitations might be overcome, and will interest practicing experimental economists, nonexperimental economists wanting to interpret experimental research, and philosophers of science concerned with the status of knowledge claims in economics.

On the theory of reference-dependent preferences

A theory is proposed in which preferences are conditional on reference points. It is related to Tversky and Kahnemans reference-dependent preference theory, but is simpler and deviates less from conventional consumer theory. Preferences conditional on any given reference point satisfy conventional assumptions. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of status quo bias and related effects. Reference points are treated as subject to change during the course of trade. The implications of endogeneity of reference points for behaviour in markets are investigated.

Testing for juxtaposition and event-splitting effects

Regret theory predicts that choices over prospects will be systematically influenced by the juxtaposition of outcomes in the payoff matrix. Experiments have found apparent juxtaposition effects of this kind. However, these experiments have not controlled for “event-splitting effects” (ESEs), by which the subjective weight given to an outcome depends on the number of states of the world in which it occurs, as well as on their combined probability. An experiment is reported that tests independently for juxtaposition effects and ESEs. The results suggest that the apparent juxtaposition effects found in previous experiments are largely due to ESEs.

Testing for Regret and Disappointment in Choice under Uncertainty

Much of the experimental evidence concerning violations of von Neumann-Morgenstern expected utility theory has been collected fr om experiments designed with conventional theory in mind and does not provide direct tests of alternative models such as regret theory and disappointment theory. This paper reports and discusses recent evidence produced by an exp erimentspe cifically designed to test for the impacts of regret and disappointment, and to indicate their relative importance. Copyright 1987 by Royal Economic Society.