Discovering Preference under Risk: An Experimental Evidence
Penulis/Author
Yudistira Hendra Permana, S.E., M.Sc., Ph.D. (1); Muhammad Ryan Sanjaya, S.E., M.Int.Dev.Ec., Ph.D. (2)
Tanggal/Date
25 2022
Kata Kunci/Keyword
Abstrak/Abstract
Introduction: Traditional economic theory assumes that the decision maker (DM) ranks his/her preferences to make a choice. However, the DM never automatically knows the utility of a prospect without tasting or experiencing it though he/she may know his/her true preferences. Background Problems: Plott (1996) coined the ‘discovered preference hypothesis’ (DPH) which postulates that the DM (perhaps) has well-defined preferences given limited awareness of the immediate environment, but the decision could be sub-optimal since the responses are impulsive. Novelty: We try to explain behaviour when the DM is given chance to discover their choice in order to maximise his/her preferences. Research Methods: We conduct an online experiment by adopting Delaney et al.’s (2019) elicitation procedures to construct our problem sets where subjects are asked to allocate their tokens (endowment) in to drawn alternatives. Necessary differences lie on the probabilistic alternatives—instead of certain prospects—and the incentive mechanism—using random incentive instead of pay-for-all incentive. We involve three different situations—which is given by the alternative structure—and divide subjects into four groups—following the endowed tokens and playing rounds—to investigate if encountered situation and privilege have something to do with preference discovery. Findings: Our results show that all subjects posses a concave pattern in allocating tokens in to non-revealed alternatives, hence exhibit risk-averse attitude or more conclusive. However, the least privileged group (lowest endowed tokens and shortest playing rounds) have a tendency to be less risk averse or less conclusive than others; they try to discover as later as possible. We also find that the more complex is the situation, the more conclusive is the subjects; which raises a question whether they simplify the problems. Conclusion: Our findings may shed the light of discovery behaviour where our subjects construct their preferences given their risk attitude knowing the consequences of discovery; then maximising their preferences. Discovery behaviour is sensitive with high-privileged agent, driving him/her to be more conclusive and more adaptive with the situation complexity. Two importances in this study are on marketing segmentation (which group being targetted of new products) and economic development (i.e. promoting new policies).
