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Estimating Subjective Probabilities

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Subjective probabilities play a role in many economic decisions. There is a largetheoretical literature on the elicitation of subjective probabilities, and an equally large empiricalliterature. However, there is a gulf between the two. The theoretical literature proposes a range ofprocedures that can be used to recover subjective probabilities, but stresses the need to make strongauxiliary assumptions or “calibrating adjustments” to elicited reports in order to recover the latentprobability. With some notable exceptions, the empirical literature seems intent on either makingthose strong assumptions or ignoring the need for calibration. We illustrate how one can jointlyestimate risk attitudes and subjective probabilities using structural maximum likelihood methods. Thisallows the observer to make inferences about the latent subjective probability, calibrating forvirtually any well-specified model of choice under uncertainty. We demonstrate our procedures withexperiments in which we elicit subjective probabilities. We calibrate the estimates of subjectivebeliefs assuming that choices are made consistently with expected utility theory or rank-dependentutility theory. Inferred subjective probabilities are significantly different when calibrated according toeither theory.

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Steffen Andersen, John Fountain, Glenn W. Harrison, E. Elisabet Rutström

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