Explaining satisficing through risk aversion
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Explaining satisficing through risk aversion Yudistira Permana1,2 Ó Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper extends the analysis of the data from the experiment of Hey et al. (Theory and Decision 83(3): 337–353, 2017), which was designed to test Proposition 2 of the theory of Manski (Theory and Decision 83(2): 155–173, 2017). I focus on how the subjects select the aspiration levels when they choose to satisfice, and try to find a better explanation for that story than that of Manski. I assume that the subjects are expected utility (EU) (rather than MiniMax regret) agents and that they think of the payoffs as having a uniform risky (rather than an ambiguous) distribution. I consider two special cases of the EU preferences: CRRA and CARA; and I combine these with two different stories for the stochastic specification of errors: beta and normal. To give a fair comparison in finding a better explanation of the individual behaviour, I also fit the data using Manski’s optimal strategy under both stochastic specifications. I estimate using maximum log likelihood. The estimation is done subject by subject. The results tell us that assuming that the subjects are EU agents and that they see the payoffs as uniformly distributed produces a better statistical explanation than that of Manski. That is the actual aspiration levels are statistically closer to the optimal aspiration levels assuming CRRA and CARA than those of Manski’s prediction. Interestingly, the subjects in the Hey et al. (2017) experiment appear to be risk loving when selecting their aspiration levels. Keywords Expected utility Risk aversion Maximum log likelihood
& Yudistira Permana [email protected] 1
Department of Economics and Business, Vocational School, Universitas Gadjah Mada, Sleman 55281, Indonesia
2
Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD, England, UK
123
Y. Permana
1 Introduction Satisficing is a term introduced by Simon (1955): a decision-maker (henceforth DM) satisfices if he or she seeks an outcome greater than or equal to some ‘satisfactory level’; the latter is usually referred to as the DM’s aspiration level. However, Simon never articulated precisely how aspiration levels should be chosen. In a recent paper, Manski (2017) rectifies this deficiency by providing a theoretical analysis of when and how a DM should satisfice, and how they should choose aspiration levels. He considers the DM in the following situation: the DM must choose a strategy, each strategy leading to a choice from a set of actions, each of which implies some payoff. There are three available strategies: no deliberation, satisficing and optimising. No deliberation incurs no cost and yields the payoff of the first-ordered element of the choice set. Satisficing incurs a cost k and provides information as to whether there is at least one action that has a payoff greater than or equal to some specified aspiration level. Opt
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