Skip to main content
SpringerLink
Log in

Belief elicitation in experiments: is there a hedging problem?

  • Published:
Experimental Economics Aims and scope Submit manuscript

Abstract

Belief-elicitation experiments usually reward accuracy of stated beliefs in addition to payments for other decisions. But this allows risk-averse subjects to hedge with their stated beliefs against adverse outcomes of the other decisions. So can we trust the existing belief-elicitation results? And can we avoid potential hedging confounds? We propose an experimental design that theoretically eliminates hedging opportunities. Using this design, we test for the empirical relevance of hedging effects in the lab. Our results suggest that hedging confounds are not a major problem unless hedging opportunities are very prominent. If hedging opportunities are transparent, and incentives to hedge are strong, many subjects do spot hedging opportunities and respond to them. The bias can go beyond players actually hedging themselves, because some expect others to hedge and best respond to this.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Allen, F. (1987). Discovering personal probabilities when utility functions are unknown. Management Science, 33(4), 542–544.

    Article  Google Scholar 

  • Andersen, S., Fountain, J., Harrison, G. W., & Rutström, E. E. (2009). Estimating subjective probabilities (Working Paper 09-01). University of Central Florida.

  • Armantier, O., & Treich, N. (2009). Subjective probabilities in games: an application to the overbidding puzzle. International Economic Review, 50(4), 1079–1102.

    Article  Google Scholar 

  • Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. In G. Constantinides, M. Harris, & R. M. Stulz (Eds.), Handbook of the economics of finance (Vol. 1, pp. 1053–1128). Amsterdam: Elsevier. Chap. 18.

    Google Scholar 

  • Beattie, J., & Loomes, G. (1997). The impact of incentives upon risky choice experiments. Journal of Risk and Uncertainty, 14(2), 155–68.

    Article  Google Scholar 

  • Berg, J., Dickhaut, J., & McCabe, K. (2005). Risk preference instability across institutions: a dilemma. Proceedings of the National Academy of Sciences USA, 102(11), 4209–4214.

    Article  Google Scholar 

  • Berninghaus, S., Güth, W., Levati, M. V., & Qiu, J. (2010, in press). Satisficing in sales competition: experimental evidence. International Journal of Game Theory.

  • Bhatt, M., & Camerer, C. F. (2005). Self-referential thinking and equilibrium as states of mind in games: fMRI evidence. Games and Economic Behavior, 52(2), 424–459.

    Article  Google Scholar 

  • Bhattacharya, S., & Pfleiderer, P. (1985). Delegated portfolio management. Journal of Economic Theory, 36(1), 1–25.

    Article  Google Scholar 

  • Blanco, M., Engelmann, D., & Normann, H.-T. (2007). A Within-subject analysis of other-regarding preferences (Working Paper). Royal Holloway, University of London.

  • Blanco, M., Engelmann, D., Koch, A. K., & Normann, H.-T. (2008). Belief elicitation in experiments: is there a hedging problem? (Discussion Paper No. 3517). Institute for the Study of Labor (IZA).

  • Blanco, M., Engelmann, D., Koch, A. K., & Normann, H.-T. (2009). Preferences and beliefs in a sequential social dilemma: a within-subjects analysis (Discussion Paper No. 4624). Institute for the Study of Labor (IZA).

  • Bolle, F., & Ockenfels, P. (1990). Prisoners’ dilemma as a game with incomplete information. Journal of Economic Psychology, 11(1), 69–84.

    Article  Google Scholar 

  • Bolton, G. E., & Ockenfels, A. (2000). ERC: a theory of equity, reciprocity, and competition. American Economic Review, 90(1), 166–193.

    Article  Google Scholar 

  • Boschloo, R. D. (1970). Raised conditional level of significance for the 2×2-table when testing the equality of two probabilities. Statistica Neerlandica, 24, 1–35.

    Article  Google Scholar 

  • Brier, G. W. (1950). Verification of forecasts expressed in terms of probability. Monthly Weather Review, 78, 1–3.

    Article  Google Scholar 

  • Charness, G., & Rabin, M. (2002). Understanding social preferences with simple tests. Quarterly Journal of Economics, 117(3), 817–869.

    Article  Google Scholar 

  • Clark, K., & Sefton, M. (2001). The sequential prisoner’s dilemma: evidence on reciprocation. Economic Journal, 111(468), 51–68.

    Article  Google Scholar 

  • Costa-Gomes, M. A., & Weizsäcker, G. (2008). Stated beliefs and play in normal-form games. Review of Economic Studies, 75(3), 729–762.

    Article  Google Scholar 

  • Croson, R. T. A. (2000). Thinking like a game theorist: factors affecting the frequency of equilibrium play. Journal of Economic Behavior and Organization, 41(3), 299–314.

    Article  Google Scholar 

  • Dufwenberg, M., & Kirchsteiger, G. (2004). A theory of sequential reciprocity. Games and Economic Behavior, 47(2), 268–298.

    Article  Google Scholar 

  • Eichberger, J., Kelsey, D., & Schipper, B. (2008). Granny versus game theorist: ambiguity in experimental games. Theory and Decision, 64(2), 333–362.

    Article  Google Scholar 

  • Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. Quarterly Journal of Economics, 75(4), 643–669.

    Article  Google Scholar 

  • Engelmann, D., & Strobel, M. (2004). Inequality aversion, efficiency, and maximin preferences in simple distribution experiments. American Economic Review, 94(4), 857–869.

    Article  Google Scholar 

  • Erev, I., Bornstein, G., & Wallsten, T. S. (1993). The negative effect of probability assessments on decision quality. Organizational Behavior and Human Decision Processes, 55(1), 78–94.

    Article  Google Scholar 

  • Falk, A., & Fischbacher, U. (2006). A theory of reciprocity. Games and Economic Behavior, 54(2), 293–315.

    Article  Google Scholar 

  • Fehr, E., & Schmidt, K. M. (1999). A theory of fairness, competition, and cooperation. Quarterly Journal of Economics, 114(3), 817–868.

    Article  Google Scholar 

  • Fehr, D., Kübler, D., & Danz, D. (2008). Information and beliefs in a repeated normal-form game (SFB 649, Discussion Paper 2008-026). Humboldt University, Berlin.

  • Fischbacher, U. (2007). Z-tree—Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178.

    Article  Google Scholar 

  • Friedman, D., & Sunder, S. (2004). Risky curves: from unobservable utility to observable opportunity sets (Mimeo).

  • Gächter, S., & Renner, E. (2010, in press). The effects of (incentivized) belief elicitation in public good experiments. Experimental Economics.

  • Gilboa, I., & Schmeidler, D. (1989). Maxmin expected utility with non-unique prior. Journal of Mathematical Economics, 18(2), 141–153.

    Article  Google Scholar 

  • Greiner, B. (2004). An online recruitment system for economic experiments. In K. Kremer, & V. Macho (Eds.), Forschung und wissenschaftliches Rechnen 2003. GWDG Bericht 63 (pp. 79–93). Göttingen: Ges. für Wiss. Datenverarbeitung.

    Google Scholar 

  • Haruvy, E., Lahav, Y., & Noussair, C. N. (2007). Traders’ expectations in asset markets: experimental evidence. American Economic Review, 97(5), 1901–1920.

    Article  Google Scholar 

  • Hertwig, R., & Ortmann, A. (2001). Experimental practices in economics: a methodological challenge for psychologists? Behavioral and Brain Sciences, 24, 383–451.

    Google Scholar 

  • Holt, C. A. (1986a). Preference reversals and the independence axiom. American Economic Review, 76(3), 508–515.

    Google Scholar 

  • Holt, C. A. (1986b). Scoring-rule procedures for eliciting subjective probability and utility functions. In P. Goel, & A. Zellner (Eds.), Bayesian Inference and Decision Techniques (pp. 279–290). Amsterdam: Elsevier.

    Google Scholar 

  • Holt, C. A., & Laury, S. K. (2002). Risk aversion and incentive effects. American Economic Review, 92(5), 1644–1655.

    Article  Google Scholar 

  • Huck, S., & Weizsäcker, G. (2002). Do players correctly estimate what others do? Evidence of conservatism in beliefs. Journal of Economic Behavior and Organization, 47(1), 71–85.

    Article  Google Scholar 

  • Isaac, R. M., & James, D. (2000). Just who are you calling risk averse? Journal of Risk and Uncertainty, 20(2), 177–87.

    Article  Google Scholar 

  • Kadane, J. B., & Winkler, R. L. (1988). Separating probability elicitation from utilities. Journal of the American Statistical Association, 83(402), 357–363.

    Article  Google Scholar 

  • Karni, E. (1999). Elicitation of subjective probabilities when preferences are state-dependent. International Economic Review, 40(2), 479–486.

    Article  Google Scholar 

  • Karni, E. (2009). A mechanism for eliciting probabilities. Econometrica, 77(2), 603–606.

    Article  Google Scholar 

  • Karni, E., & Safra, Z. (1995). The impossibility of experimental elicitation of subjective probabilities. Theory and Decision, 38(3), 313–320.

    Article  Google Scholar 

  • Manski, C. F. (2004). Measuring expectations. Econometrica, 72(5), 1329–1376.

    Article  Google Scholar 

  • Nyarko, Y., & Schotter, A. (2002). An experimental study of belief learning using elicited beliefs. Econometrica, 70(3), 971–1005.

    Article  Google Scholar 

  • Offerman, T., Sonnemans, J., & Schram, A. (1996). Value orientations, expectations and voluntary contributions in public goods. Economic Journal, 106(437), 817–45.

    Article  Google Scholar 

  • Offerman, T., Sonnemans, J., van de Kuilen, G., & Wakker, P. P. (2009). A truth-serum for non-Bayesians: correcting proper scoring rules for risk attitudes. Review of Economic Studies, 76(4), 1461–1489.

    Article  Google Scholar 

  • Rey-Biel, P. (2009). Equilibrium play and best response to (stated) beliefs in normal form games. Games and Economic Behavior, 65(2), 572–585.

    Article  Google Scholar 

  • Rutström, E. E., & Wilcox, N. T. (2009). Stated beliefs versus inferred beliefs: a methodological inquiry and experimental test. Games and Economic Behavior, 67(2), 616–632.

    Article  Google Scholar 

  • Savage, L. J. (1971). Elicitation of personal probabilities and expectations. Journal of the American Statistical Association, 66(336), 783–801.

    Article  Google Scholar 

  • Schlag, K. H. (2010). New and old results not only for experimental game theory (Mimeo). Universitat Pompeu Fabra.

  • Schlag, K. H., & van der Weele, J. (2009). Eliciting probabilities, means, medians, variances and covariances without assuming risk neutrality? (Mimeo). Universitat Pompeu Fabra.

  • Selten, R. (1998). Axiomatic characterization of the quadratic scoring rule. Experimental Economics, 1(1), 43–61.

    Google Scholar 

  • Wilcox, N. T., & Feltovich, N. (2000). Thinking like a game theorist: comment (Mimeo). University of Houston.

  • Winkler, R. L., & Murphy, A. H. (1970). Nonlinear utility and the probability score. Journal of Applied Meteorology, 9(1), 143–148.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Economics Department, Universidad del Rosario, Calle 14 No. 4-80, Bogotá, Colombia

    Mariana Blanco

  2. Department of Economics, University of Mannheim, L7, 3-5, 68131, Mannheim, Germany

    Dirk Engelmann

  3. Centre for Experimental Economics, University of Copenhagen, Copenhagen, Denmark

    Dirk Engelmann

  4. Economics Institute of the Academy of Sciences of the Czech Republic, Prague, Czech Republic

    Dirk Engelmann

  5. School of Economics and Management, Aarhus University, Building 1322, 8000, Aarhus C, Denmark

    Alexander K. Koch

  6. Düsseldorf Institute for Competition Economics (DICE), Düsseldorf University, 40225, Düsseldorf, Germany

    Hans-Theo Normann

  7. Max-Planck Institute for Research on Collective Goods, Bonn, Germany

    Hans-Theo Normann

Authors
  1. Mariana Blanco
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Dirk Engelmann
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Alexander K. Koch
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Hans-Theo Normann
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dirk Engelmann.

Electronic Supplementary Material

Below is the link to the electronic supplementary material.

(PDF 384KB)

Rights and permissions

Reprints and permissions

About this article

Cite this article

Blanco, M., Engelmann, D., Koch, A.K. et al. Belief elicitation in experiments: is there a hedging problem?. Exp Econ 13, 412–438 (2010). https://doi.org/10.1007/s10683-010-9249-1

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10683-010-9249-1

Keywords

JEL Classification

Search

Navigation