ABDELLAOUI Mohammed

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This thesis explores several intertwined dimensions of decision research. In particular, while focusing on decisions under risk and uncertainty, this work illustrates the transversality of approaches that characterize this field of investigation by bringing together experimental study, theoretical development and application. The continuous dialogue between these different approaches to decision research is essential to its development, as empirical investigations test and illuminate formal theories and further ensure their meaningful application in theoretical and empirical contexts, thus contributing to a virtuous dynamic of "creative destruction" in the field of study. For example, a large body of empirical evidence shows violations of expected utility theory. In response, decision theory and behavioral economics have provided a wide variety of non-expected utility theories. However, the existing evidence does not clearly distinguish between these theories. In the investigation of the sources of violations, particular attention is traditionally devoted to testing several variants of the independence axiom. Yet, in the domain of earnings, many of the best-known non-expected utility models adhere to the minimal behavioral restrictions traditionally known as Savage's (1954) P3 and P4 axioms, which allow for the separation of tastes, as captured by a utility function, and beliefs, often captured by a distorted probability. In the first chapter of this thesis, we derive a nonparametric procedure for testing the separability hypothesis of tastes and beliefs and apply it to the results of two experiments. Although P3 is rarely violated, our test reveals widespread and pronounced violations of P4, suggesting that the assumption of separability of tastes and beliefs may not hold in empirical settings. On the theoretical side, the question of the separation of tastes and beliefs has apparently been closed by a series of papers by Ghirardato and Marinacci on biseparable preferences. Inspired by the findings of the previous chapter, the second chapter of this thesis aims to reopen this question by investigating whether, or under what theoretical conditions, such a separation actually holds and what its implications are. In particular, we will provide separability conditions in terms of preference midpoints and the new concept of likelihood midpoints. In the third chapter, we use recent developments in decision making criteria to provide an extension of Brandenburger and Stuart's (2007) seminal biform games setup. While biform games provide the theoretical basis for formal work in value-based strategy, our framework helps reconcile observed behavior in applied settings with the theory. In particular, we apply the results of our theory to the choice to involve substitutes for complementors in business ecosystems, a central decision in competitive strategy. Our solution has several advantages. First, it subsumes the original biform game framework and seamlessly integrates recent related work that provides bounds on value capture. In addition, it addresses issues such as the possible non-uniqueness of solutions and the invariance of the structure of the competitive environment while retaining the role of competition in determining value capture. Finally, it allows for richer preference representations that, for example, can include subjective distortions of the objective chances of value capture.

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The field of decision theory has been very active since von Neumann Morgenstern 1943. New decision models have revolutionized the way we can analyze our actions and decisions. However, Allais' paradox in 1953 forced theorists to clarify the purpose of their models. This evolution allowed the discipline to define clear and solid methods of empirical validation of its descriptive approach. However, in contrast, normative decision theory is still struggling to determine an objective and constructive methodology to settle its internal debates about the rationality of decision-theoretic models. Providing such a methodology is the main objective of this thesis.

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We propose a simple, parameter‐free method that, for the first time, makes it possible to completely observe Tversky and Kahneman’s (1992) prospect theory. While methods existed to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby it can measure prospect theory’s entire utility function. Consequently, we can properly identify properties of utility and perform new tests of prospect theory. We implemented our method in an experiment and obtained support for prospect theory. Utility was concave for gains and convex for losses and there was substantial loss aversion. Both utility and loss aversion were the same for risk and ambiguity, as assumed by prospect theory, and sign‐comonotonic trade‐off consistency, the central condition of prospect theory, held.

This thesis uses the methods of behavioral economics to contribute to the study of intertemporal choice. First, the influence of present bias and consumer naivety on the market power of firms is studied. By giving more market power to firms, present-biased but sophisticated consumers allow firms to increase their profits. Under certain conditions, present bias can also increase social welfare. Individual naivety either does not change equilibrium profit or decreases it and systematically leads to a decrease in social welfare. Second, this thesis measures, through a laboratory experiment, the ability of individuals to anticipate their biases associated with intertemporal choices, the bias for the present or the bias for the future. The biases and their anticipation are measured from the choice of monetary allocations between two dates and the anticipation of these choices. The main result that emerges from this study is that individuals who are biased by the present or by the future tend to underestimate their bias. Finally, this thesis provides a theoretical explanation for the link between risk aversion and the screening decision. If the information is only instrumental, risk aversion increases the probability of screening. However, considering also the emotional value of the information, if the individual is highly averse to the information, if they value a negative emotional response relatively more than a positive one, the more risk averse they are and the less likely they are to choose screening.

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Attitudes toward uncertainty with consequences in monetary and time units: supporting experimental studies.

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Entrepreneurship researchers have concluded that overconfidence may play a role in entrepreneurial decisions. While informative, this research offers only limited explanations of the mechanisms through which overconfidence contributes to observed behavior. Furthermore, important aspects of research on uncertainty and ambiguity, which are quintessential to entrepreneurial activity, are partially addressed, whereas most studies focus on risk. My dissertation focuses on entrepreneurs' attitudes toward ambiguity and the impact of overconfidence. Given this objective, I employ theories of ambiguity to design a number of experiments, each aimed at answering specific research questions, contributing to the overall theme of this thesis. My results suggest that overconfidence makes decision makers more prone to ambiguity, and both phenomena depend on context and probability. I also find that entrepreneurs are more optimistic than non-entrepreneurs when faced with decisions in situations of risk or ambiguity. That being said, entrepreneurs are more pessimistic in ambiguous situations than in risky ones, while non-entrepreneurs do not make a difference. The contribution of my work is to get entrepreneurs to do what they do best: decide under ambiguous conditions in a laboratory or in nature.

Uncertainty pervades most aspects of life. From selecting a new technology to choosing a career, decision makers rarely know in advance the exact outcomes of their decisions. Whereas the consequences of decisions in standard decision theory are explicitly described (the decision from description (DFD) paradigm), the consequences of decisions in the recent decision from experience (DFE) paradigm are learned from experience. In DFD, decision makers typically overrespond to rare events. That is, rare events have more impact on decisions than their objective probabilities warrant (overweighting). In DFE, decision makers typically exhibit the opposite pattern, underresponding to rare events. That is, rare events may have less impact on decisions than their objective probabilities warrant (underweighting). In extreme cases, rare events are completely neglected, a pattern known as the “Black Swan effect.” This contrast between DFD and DFE is known as a description–experience gap. In this paper, we discuss several tentative interpretations arising from our interdisciplinary examination of this gap. First, while a source of underweighting of rare events in DFE may be sampling error, we observe that a robust description–experience gap remains when these factors are not at play. Second, the residual description–experience gap is not only about experience per se but also about the way in which information concerning the probability distribution over the outcomes is learned in DFE. Econometric error theories may reveal that different assumed error structures in DFD and DFE also contribute to the gap.

This is the web appendix of the paper "Experiments on Compound Risk in Relation to Simple Risk and Ambiguity", forthcoming in Management Science.

We elicited the prospect theory components (utility, probability weighting, and loss aversion) when consequences are expressed as the time dedicated to a specific task or activity. A similar elicitation was performed for monetary consequences to allow an across-attribute (time/money) comparison of the elicited components (at the individual level). We obtained less concave utility and smaller loss aversion for time than for money. Moreover, while the probability weighting was predominantly inverse S-shaped for both attributes, it was less sensitive to probabilities and more elevated for time than for money. This finding implies more optimism for gains and more pessimism for losses.

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The nature of utility is controversial. Whereas decision theory commonly assumes that utility is context specific, applied and empirical decision analysis typically assumes one unifying concept of utility applicable to all decision problems. This controversy has hardly been addressed empirically because of the absence of methods to measure utility outside the context of risk. We introduce a method to measure utility over time and compare utility under risk and utility over time. We distinguish between gains and losses and also measure loss aversion. In two experiments we found that utility under risk and utility over time differed and were uncorrelated. Utility under risk was more curved than utility over time. Subjects were loss averse both for risk and for time, but loss aversion was more pronounced for risk. Loss aversion over risk and time were uncorrelated. This suggests that loss aversion, although important in both decision contexts, is volatile and subject to framing.

Allowing for sign-dependence in discounting substantially improves the description of people's time preferences. The deviations from constant discounting that we observed were more pronounced for losses than for gains. Our data also suggest that the discount function should be flexible enough to allow for increasing impatience. These findings challenge the current practice in modeling intertemporal choice where sign-dependence is largely ignored and only decreasing impatience is allowed. The sign-dependent model of Loewenstein and Prelec (1992) with the constant sensitivity discount function of Ebert and Prelec (2007) provided the best fit to our data.

The thesis, entitled "Essay on Discounting Theory: Subjective Expected Utility and Sensitivity to Variation", falls within the research perimeter associated with the theory of intertemporal decision making, and takes two paths that have been relatively unexplored until now. On the one hand, it questions the observed - and modelled - diversity of discounting mechanisms by seeking to explain such diversity on the basis of a single behavioural structure (Part I. An investigation of discounting). On the other hand, in the face of this increasing diversity of discounting mechanisms, the thesis questions the condition of temporal coherence by seeking to characterize coherent temporal preferences on the basis of the same behavioral structure defined in the first part (Part II. An investigation of temporal coherence).

Prospect theory is increasingly used to explain deviations from the traditional paradigm of rational agents. Empirical support for prospect theory comes mainly from laboratory experiments using student samples. It is obviously important to know whether and to what extent this support generalizes to more naturally occurring circumstances. This article explores this question and measures prospect theory for a sample of private bankers and fund managers. We obtained clear support for prospect theory. Our financial professionals behaved according to prospect theory and violated expected utility maximization. They were risk averse for gains and risk seeking for losses and their utility was concave for gains and (slightly) convex for losses. They were also averse to losses, but less so than commonly observed in laboratory studies and assumed in behavioral finance. A substantial minority focused on gains and largely ignored losses, behavior reminiscent of what caused the current financial crisis.

To what extent does the behavior of decision makers conform to the predictions of decision models in an uncertain environment? Economic behavior is often influenced by the informational structure of the decision context. In particular, the concomitance (juxtaposition or combination) of two sources of uncertainty - risk (known probabilities) and ambiguity (unknown probabilities of events) - gives rise to behaviors that are not compatible with the standard models of decision theory, the subjective expected utility model and its extension to non-additive probabilities, the Choquet expected utility model. The behavioral component at the basis of the uncertainty paradoxes is the fact that individuals have a (non-neutral) attitude towards ambiguity. This thesis proposes different empirical studies aiming at highlighting the heterogeneity of attitudes towards ambiguity in the light of the variability of uncertainty structures. These studies deal with two main cases: when the decision-maker is confronted with two separate sources of uncertainty (Ellsberg's two-color paradox) . when the decision-maker is confronted with a mix of uncertainties (Machina's paradox).

In this work, the utility functions of portfolio managers are elicited and their degrees of loss aversion measured under the hypothesis of prospect theory (1992) and following the non-parametric method of Abdellaoui et al. The results obtained in the field corroborate the results obtained by the latter in the laboratory regarding the concavity of the utility function for gains and the convexity for losses. Regarding loss aversion, our observations confirm its existence. nevertheless, the median portfolio manager is less loss averse than the median student. Conditions that characterize real market experience but are difficult to reproduce in the artificial context of the laboratory could explain the differences in behavior: in particular, the volatility of the stock market, the incentive compensations of Wall Street and the fact that portfolio managers acquire a range of training and a high level of knowledge in the field that make them evaluate the stakes differently from students. The utility function must, however, reflect the preferences of the individual and the utility must not change depending on the method used. Indeed, the qualitative study of MBA students' preferences using the non-parametric method of Baucells and Heukamp (2006) confirms the results of Abdellaoui et al. It should be noted, however, that students change their preference (from loss averse to gain seeking) when one of the two lotteries offers a higher overall probability of gain or a higher probability of maximum gain combined with a limited extreme loss.

The thesis deals with the theory of individual decision under uncertainty. It aims at understanding, describing and representing decisions, by differentiating what comes from the decision maker's beliefs from what is related to his attitude towards uncertainty. It is mainly composed of four complementary contributions. The first one is theoretical and characterizes the attitude towards risk and ambiguity through the use of trade-off relations concerning the consequences, in the line of expected utility models, representing the aversion to risk and/or ambiguity through the decrease of the marginal utility. The rest of the thesis is based on models generalizing expected utility where probabilities are transformed by the decision maker. The second contribution is then experimental and focuses on the decision-maker who has expert opinions indicating the risk incurred. A method is proposed, based on the observation of choices, to study how the decision-maker combines the opinions at his disposal. This method is applied to compare situations where experts give an imprecise assessment of the risk with situations where their assessments of the risk incurred are conflicting. The third work introduces the concept of a uniform source of uncertainty, i.e. a set of events generated by the same uncertainty mechanism and for which there is a subjective probability measure. An experiment is conducted in which such subjective probabilities are obtained. The willingness of individuals to bet on events of equivalent (subjective) probability but coming from different sources is then studied. The last contribution goes back to the method of obtaining subjective probabilities and compares it (theoretically) to other methods. Its feasibility and limitations are then studied in a new experiment.

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