This project uses a series of decision making experiments to gather data for understanding choice under uncertainty. The project also develops tools for the theoretical analysis of choice under uncertainty and a blend of parametric and non-parametric econometric techniques for testing the theory with the new data. The theoretical and experimental aspects of the project provide a richer understanding of risk preferences and the choices that implement them.
The experiments provide a positive account of choice under uncertainty in an environment that allows for a general characterization of the patterns of individual behavior. Previous data show that although there is considerable heterogeneity in choce behavior, participants do behave in a way that is consistent in the sense that choices maximize a consistent set of preferences. However, subjects also use identifiable common heuristics (rules of thumb) to make decisions. These two different kinds of behavior reflect two different kinds of rationality: substantive rationality and procedural rationality. The new theory combines these two different ideas into a single model and the research team will use the new theory to develop a method to identify when people make decisions using procedural or substantive rationality.
Understanding how people make decisions in risky situations is an important and interdisciplinary research question that also has important implications for public policy. The experimental platform and the analytical techniques that the researchers are developing will be broadly useful to the research community.
