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Dual Criteria Decisions

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The most popular models of decision making use a single criteria to evaluateprojects or lotteries. However, decision makers may actually consider multiplecriteria when evaluating projects. We consider a dual criteria model from psychology.This model integrates the familiar tradeoffs between risk and utility that economiststraditionally assume, allowance for rank-dependent decision weights, andconsideration of income thresholds. We examine the issues involved in fullmaximum likelihood estimation of the model using observed choice data. Wepropose a general method for integrating the multiple criteria, using the logic ofmixture models, which we believe is attractive from a decision-theoretic andstatistical perspective. The model is applied to observed choices from a major naturalexperiment involving intrinsically dynamic choices over highly skewed outcomes.The evidence points to the clear role that income thresholds play in such decisionmaking, but does not rule out a role for tradeoffs between risk and utility orprobability weighting.

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Steffen Andersen, Glenn W. Harrison, Morten Igel Lau, Elisabet E. Rutström

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