1. Is there a valuation gap? The case of interval valuations, with Bengt Kriström published in Economics Bulletin, 36(1), 218–236. Download
We extend the literature on the willingness-to-pay/willingness-to-accept (WTP/WTA) disparity by testing two hypotheses, distilled from the literature. We also introduce a modified mechanism for eliciting the subjective valuation range if the individual cannot articulate the subjective value as a precise amount confidently. We elicited valuations for four goods: three ordinary market goods and a lottery ticket. Under the conventional setting in which subjects are asked to state a single precise amount, we observed a significant disparity for the lottery ticket. On the other hand, our key finding is that the disparity disappears under the intervals treatment, suggesting that response format is important, given that earlier experimental studies invariably uses point values (i.e. open ended questions about WTP/WTA). Moreover, for the risky prospect we observe that from their admissible range the buyers state the lower bound as their WTP whereas sellers state the upper bound as their WTA. We conclude that this type of behavior can to some extent explain the observed disparity at least for the risky prospects.
2. Expected utility theory with imprecise probability perception: explaining preference reversals, with John D. Hey published in Applied Economics Letters, Download
This article presents a new model for decision-making under risk, which provides an explanation for empirically-observed preference reversals. Central to the theory is the incorporation of probability perception imprecision, which arises because of individuals’ vague understanding of numerical probabilities. We combine this concept with the use of the Alpha EU model and construct a simple model which helps us to understand anomalies, such as preference reversals and valuation gaps, discovered in the experimental economics literature, that standard models cannot explain.
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