attention and revealed preference in a portfolio choice problem

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Attention and Revealed Preference in a Portfolio Choice Problem Peter J. Hammond, Warwick Stefan Traub, Bremen Workshop on noise and imprecision in individual and interactive decision- making Warwick, April 16 th -18 th 2012 1

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Attention and Revealed Preference in a Portfolio Choice Problem. Peter J. Hammond, Warwick Stefan Traub, Bremen. Workshop on noise and imprecision in individual and interactive decision-making Warwick, April 16 th -18 th 2012. Outline. Motivation Theory The Experiment Attention Results - PowerPoint PPT Presentation

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Page 1: Attention and Revealed Preference in a Portfolio Choice Problem

Attention and Revealed Preference in a Portfolio Choice Problem

Peter J. Hammond, WarwickStefan Traub, Bremen

Workshop on noise and imprecision in individual and interactive decision-making

Warwick, April 16th-18th 2012

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Outline

1. Motivation2. Theory3. The Experiment4. Attention5. Results6. Conclusions

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1. Motivation

• Several recent economic & psychological theories addressing the allocation of attention in choice tasks in order to explaining errors, noise, and choice anomalies - Sims (2003) Theory of Rational Inattention, tested experimentally

by Cheremukhin et al. (2011)- Gabaix, Laibson [et al.] (2000, 2006) Directed Cognition Model- Townsend, Busemeyer (1989), Busemeyer, Diederich (2002)

Decision Field Theory- DePalma et al. (1994); Hensher et al. (2005); Cameron, DeShazo

(2011); ...

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1. Motivation

• Our research - Question: Is attention related to choice “quality”- Method: Choice experiment with recorded attention- Setup: Portfolio selection problem, 16 rounds with up to 3 stages- Measurement of Attention: Record the time that subjects

“activate” a certain portfolio in each task- Measurement of Choice Quality: Check for first-order stochastic

dominance and GARP consistency

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2. Theory

• First-order stochastic dominance - Two Arrow securities (A, B), budget constraint e=pAxA+ pBxB

- Safe portfolio (xA=xB)- Segment of budget line with stochastically dominated portfolios

Fig. Safe portfolio and first-order stochastic dominance.

Portfolios on the red part of the budget line are stochastically dominated

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2. Theory

• Varian’s (1982, 2006) supporting set - Sequence of n choices- Supporting set predicts choice n+1 (if rational in terms of GARP)

Fig. Example of the supporting set of a three-stage choice task.

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3. The Experiment

• University of Warwick, 41 non-economics undergraduates• portfolio investment problem as in Choi et al. (2007)• 100 tokens to be allocated between 2 Arrow securities• 1 token = £ 0.2• 2 probabilities: identical (1/2:1/2) or asymmetric (2/3:1/3)• 8 different p’s (exchange rates between tokens and securities)

(1, 1.5), (2, 1), (1, 2.5), (3, 1), (1.5, 2), (2.5, 1.5), (3, 1.5), (2, 3)• 16 decision tasks with up to 3 stages

- 1. stage: 16 possible combinations of price vectors and probabilities- 2. and 3. stage: individualized choices constructed from 1st stage

choices (if possible)

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3. The Experiment

• time constraint (30 seconds per choice)• payoff: £ 5 show up fee + one randomly selected choice (account)• altogether ~ £ 500• written instructions + individual training sessions

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3. The Experiment

Fig. First-stage choice problem.

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3. The Experiment

Fig. Second-stage choice problem.

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3. The Experiment

Fig. Third-stage choice problem.

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3. The Experiment

Fig. Supporting set.

Supporting set

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Fig. Example ofattention data for an arbitrary subject.

4. Attention

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Fig. Example of attention data for an arbitrary subject. Details for Round 3, Choices 1-3.

1. stage

2. stage

3. stage

Time units~50ms

Legend: Blue circles represent portfolios increasingly ordered by the number of tokens allocated to account B. The height of each peak specifies the number of time units (of 50ms) the respective portfolio was activated. Green markers represent actual choices. Red markers represent the left and right limit portfolios of the GARP supporting set.

4. Attention

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Allocation of tokens to B account

Time units~50ms

Fig. Construction of a histogram of the distribution of attention.

Used for the computation of mean, coefficient of variation, skewness and kurtosis of the distribution of attention.

4. Attention

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5. Results

Choice-based analysis• 1588 valid choices• 303 (19%) dominated• Meantime (average attention per portfolio in terms of tu’s including zeros

- 3.84 (undominated) vs. 4.79 (dominated) , p<.001- if dominated portfolio chosen, subject spent about 0.1 sec longer on

each available portfolio- includes “zeros” (portfolios that did not receive any attention)- excluding zeros does not change results!

Fig. Boxplot Meantime by Dominance.

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5. Results

Fig. Boxplots for Coefficient of Variation, Skewness, and Kurtosis by Dominance.

All T-tests significant (p<.001).

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5. Results

Tab. Logistic regression. Pooled Sample.Endogenous Variable: Chosen portfolio is dominated (domi=1).

Logistic regression Number of obs = 1588 LR chi2(4) = 28.58 Prob > chi2 = 0.0000Log likelihood = -759.68494 Pseudo R2 = 0.0185

------------------------------------------------------------------------------ domi | Coef. Std. Err. z P>|z| [95% Conf. Interval]-------------+---------------------------------------------------------------- meantime | .0484309 .0182372 2.66 0.008 .0126865 .0841752 cvartime | .1164184 .1340328 0.87 0.385 -.1462812 .3791179 skewtime | .3711099 .258087 1.44 0.150 -.1347314 .8769512 kurttime | -.067524 .0261719 -2.58 0.010 -.11882 -.016228 _cons | -2.167672 .4683899 -4.63 0.000 -3.085699 -1.249645------------------------------------------------------------------------------

Choice-based analysis• Does the shape of the density function of attention predict dominance

violations?

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5. Results

Choice-based analysis• Does the shape of the density function of attention predict dominance

violations?- Yes, but with many reservations:- Variance, Skewness, Kurtosis highly correlated (rho>0.9)- Very little variance explained (<2%)- Strong gender effect (explains about 5% of the variance)- Gender, however, is not correlated with the moments (mean, kurtosis)- Including subjects & time fixed effects in order to take account panel

structure: Mean insignificant, Higher moments still significant

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5. Results

Subject-based analysis• Distribution function of attention aggregated over up to 48 choices• Endogenous variable GARP consistency (based on a nonparametric test by

Hammond, Traub (2012))• Logistic regression: insignificant (low n!)

Fig. Boxplots for Coefficient of Variation, Skewness, and Kurtosis by Rational (GARP consistency).

All T-tests significant (p<.001).

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6. Conclusions

(Preliminary)• As it seems, subjects who performed worse

- required more time per choice alternative (mean)- exhibited lower variance, skewness, kurtosis (-> less “extreme” time

allocation)• Further questions:

- Better measures of the distribution of attention than central moments (censored, zeros, ...)

- ...

Page 22: Attention and Revealed Preference in a Portfolio Choice Problem

•Conference on Noisy Models of Behaviour, University of Warwick

•A Stochast ic Process Model o f A t tent ion, then Choice, Inspired by Decis ion Fie ld Theory

•Peter J. Hammond, with Stefan Traub

•April 18, 2012

Page 23: Attention and Revealed Preference in a Portfolio Choice Problem

•Conference on Noisy Models of Behaviour, University of Warwick

•Stochast ic Choice Model

Page 24: Attention and Revealed Preference in a Portfolio Choice Problem

1.Conference on Noisy Models of Behaviour, University of Warwick

1.Cho ice and A t ten t i on Da ta

Page 25: Attention and Revealed Preference in a Portfolio Choice Problem

1.Conference on Noisy Models of Behaviour, University of Warwick

1.Stochast ic Process of At tent ion, then Choice

Page 26: Attention and Revealed Preference in a Portfolio Choice Problem

1.Conference on Noisy Models of Behaviour, University of Warwick

1.Markov Transi t ion and Switching Probabi l i t ies

Page 27: Attention and Revealed Preference in a Portfolio Choice Problem

•Conference on Noisy Models of Behaviour, University of Warwick

•New Experiments

•The task we face now is to try to devise a new experiment, and revise the software that records the attention process, in order to begin investigating empirically

•this version of a DFT process.

•More data on expectations?