Eliciting and estimating valid subjective probabilities: An experimental investigation of the Exchangeability Method.

Simone Cerroni, Sandra Notaro, W. Douglass Shaw

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

Using a laboratory experiment, we investigate whether incentive compatibility affects subjective probabilities elicited via the exchangeability method (EM), an elicitation technique consisting of several chained questions. We hypothesize that subjects who are aware of the chaining strategically behave and provide invalid subjective probabilities, while subjects who are not aware of the chaining state their real beliefs and provide valid subjective probabilities. The validity of subjective probabilities is investigated using de Finetti's notion of coherence, under which probability estimates are valid if and only if they obey all axioms of probability theory.
Four experimental treatments are designed and implemented. Subjects are divided into two initial treatment groups: in the first, they are provided with real monetary incentives, and in the second, they are not. Each group is further sub-divided into two treatment groups, in the first, the chained structure of the experimental design is made clear to the subjects, while, in the second, the chained structure is hidden by randomizing the elicitation questions.
Our results suggest that subjects provided with monetary incentives and randomized questions provide valid subjective probabilities because they are not aware of the chaining which undermines the incentive compatibility of the exchangeability method.
Original languageEnglish
Pages (from-to)201-215
Number of pages15
JournalJournal of Economic Behavior & Organization
Volume84
Issue number1
Early online date14 Aug 2012
DOIs
Publication statusPublished - Sep 2012

Keywords

  • Subjective probabilites
  • exchangeability
  • validity
  • pesticide residues
  • apples

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