Events

Prof. Soo Hong Chew
Professor
Southwestern University of Finance & Economics.

Prof. Chew plans to present two papers at the seminar

Source Recursive Expected Utility on Rich Mixture Sets:

Risks are from various sources of uncertainty and rich procedures of resolution. Building on the Herstein-Milnor mixture set axiomatization of expected utility theory, we employ multiple mixture operators each modeling a source of risk to arrive at a definition of rich mixture sets. This enables a weakening of the reduction of compound lottery axiom leading to an axiomatization of source recursive expected utility (SREU). In general, our approach allows for a broad range of source-based procedural preference and offers a tool to characterize them. In particular, when there is consistent preference for the “same” lottery resolved by the preferred source, SREU points out a preference for risk being resolved more decisively by the preferred source.

Experimental Evidence of Source Preference: Familiarity and Home bias: 

The source preference hypothesis of Fox and Tversky (1995) posits that people may have preference between equally distributed risks depending on the underlying source of uncertainty. Using a novel trailing digit design, we identify familiarity bias that is free from other confounds such as ambiguity aversion or information advantage. The first set of four experiments show familiarity bias in portfolio choice, valuation of stocks, and market indices, with home serving as proxy for familiarity. In a further experiment using real-life investors in Hong Kong and the United States, we find evidence of subjects’ home bias in real-life being linked to familiarity bias but not to ambiguity aversion or information advantage.