Title: CORRELATION PREFERENCE

Speaker: Xinhan Zhang

Time: Feb 11, 2025 (Tues) 15:30 - 17:00 pm

Online: https://us02web.zoom.us/j/8089091002?pwd=cHN4SzE4a3FLWnZCQnBZczczdVlUdz09&omn=86349307216

Abstract:

The importance of correlation sensitivity in binary choice is evident in the in-creasing infuence of regret and salience in the decision-making literature. We beginwith a general framework to investigate choice between pairs of possibly correlatedlotteries. This encompasses the development from regret theory reflecting counter-factual thinking arising from state-by-state comparisons in pairs of interdependentlotteries to salience theory, which incorporates sensory-driven contrast effects onprobability weighting. We axiomatize two classes of preference corresponding re-spectively to the correlation counterparts of the independence axiom for expectedutility and two axioms in non-expected utility characterizing weighted utility. Theresulting correlation erpected utility and correlation weighted utility can be discriminated using recent evidence of correlation-sensitive Allais behavior which supportsthe latter model. This is illustrated using a parametric specification of correlationweighted utility comprising a two-parameter exponential weighted utility componentand a one-parameter salience theory component.