Browsing by Author "Sarver, TD"

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    Behavioral Characterizations of Naiveté for Time-Inconsistent Preferences
    (Economic Research Initiatives at Duke (ERID), 2016-11-14) Ahn, D; Iijima, R; Yaouanq, Y; Sarver, TD
    We propose nonparametric definitions of absolute and comparative naiveté. These definitions leverage ex-ante choice of menu to identify predictions of future behavior and ex-post (random) choices from menus to identify actual behavior. The main advantage of our definitions is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent between choosing from a menu ex post or committing to the actual distribution of choices from that menu ex ante. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. We propose two definitions of comparative naiveté and explore the restrictions implied by our definitions for several prominent models of time inconsistency. Finally, we discuss the implications of general naiveté for welfare and the design of commitment devices.
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    Comparative Measures of Naivet é
    (Economic Research Initiatives at Duke (ERID), 2015-04-28) Ahn, D; Sarver, TD
    We propose nonparametric definitions of absolute and comparative naiveté. These definitions leverage both ex-ante choice of menu to identify individuals' projections of their future behavior and ex-post choice from menus to identify their actual behavior. Their main advantage is their independence from any assumed functional form for the utility function representing behavior. An individual is sophisticated if she is indifferent between choosing from a menu ex post or committing to the actual choice from that menu ex ante. She is naive if she prefers the flexibility in the menu, reflecting a mistaken belief that she will act more virtuously than she actually will. One individual is more naive than another if she is both more optimistic about her future behavior while actually being less virtuous. In the case of Strotzian preferences, absolute naiveté implies that beliefs are a convex combination of virtuous and temptation utility, while comparative naiveté implies that the more naive individual's beliefs puts more weight than a more sophisticated individual on her virtuous utility, while her actual behavior puts more weight on the temptation utility. In different specifications of the underlying Strotzian preferences, such as quasi-hyperbolic discounting, the definitions impose further intuitive restrictions, such as inequalities on believed and actual present-bias factors. We propose suitable definitions for random choice. Finally, we discuss the implications of naiveté for welfare and the design of commitment devices.
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    Mixture-Averse Preferences and Heterogeneous Stock Market Participation
    (Economic Research Initiatives at Duke (ERID), 2016-09-09) Sarver, TD
    To study intertemporal decisions under risk, we develop a new recursive model of non-expected-utility preferences. The main axiom of our analysis is called mixture aversion, as it captures a dislike of probabilistic mixtures of lotteries. Our representation for mixture-averse preferences can be interpreted as if an individual optimally selects her risk attitude from some feasible set. The representation includes special cases where the choice of risk attitude takes the form of an optimal selection of a reference point. We analyze the implications of the model for both insurance and investment decisions. The main application of the paper shows that mixture-averse preferences can generate endogenous heterogeneity in equilibrium stock market participation, even when consumers have identical preferences and even among wealthy households.