CeDEx Brown Bag Seminar - Neil Stewart (Warwick)

This week's Brown Bag will be given by Professor Neil Stewart (Warwick Business School). Neil will be combining two short, related talks to get feedback from Nottingham colleagues.

Psychological parameters have units: Why some parameters are correlated and why some don't mean what we intend

To fit models like prospect theory or expected utility theory to choice data,  a stochastic model is needed to turn differences in psychological values (or utilities) into choice probabilities. In these models, the parameter measuring risk aversion is strongly correlated with the parameter measuring the sensitivity to differences in psychological value. We use dimensional analysis from the physical sciences to show that this is because the sensitivity parameter has units which depend on the risk aversion parameter. This means that comparing sensitivities across individuals with different level of risk   aversion is meaningless and forbidden. We explore bug fixes which attenuate or remove the correlation. Dimension analysis shows why the risk aversion parameter is meaningful, but the sensitivity parameter is meaningless.

On the futility of estimating utility functions: Why the parameters we  measure are wrong, and why they do not generalize

We have known for a long time that people's risky choices depart systematically from expected utility theory, and also from related models like prospect theory. But it is still common to use expected utility theory or prospect theory to estimate parameters like risk aversion from sets of risky   choices. We have also known for a long time that when parameters are estimated, a systematic departure between the model and the data causes biased parameter estimates. Here we show how the bias in parameter estimation         interacts with the set of choices presented to participants. Parameters do not generalise at all between choice sets, even when the sets are random draws from a master choice  set.

1pm to 2pm - A41 Sir Clive Granger (lunch provided).