CESARE
CESARE
The work of CESARE over the next two years will be largely centered on a MIUR-financed project entitled "Risk and ambiguity: new theories and applications to market analysis and institutional design". This is an ambitious project involving five Italian universities: LUISS, the University of Bari, the University of Ferrara, the University of Piemonte Orientale and the University of Siena.
The unifying theme of this ambitious and potentially far-reaching proposal is the investigation of non-standard theories of economic behaviour under risk and ambiguity. Over the past 20 years, and increasingly so over the past decade, economists have been active in producing theories of behaviour built on less stringent concepts of ‘rational' behaviour. There is an increasing acceptance of what is now termed Behavioural Economics, both from hard-liners coming from the conventional wisdom and from those approaching the idea from outside mainstream economics. This proposal is to investigate these new ‘non-standard' theories, both at their foundational levels, and also in terms of their ability to help us understand how markets operate, and how we might design appropriate institutions in a world of risk and ambiguity.
What we call ‘non-standard theories' are those theories which depart from ultra-strict definitions of rationality in behaviour. Two decades ago, economics was dominated by standard theories with strict ideas of rationality: for example, (subjective) Expected Utility theory for behaviour under (ambiguity) risk; exponential discounting for dynamic decision making; strong Nash Equilibrium for behaviour in games; and strict self utility maximising for behaviour involving groups of people. In all these areas, the past 20 years have seen a proliferation of new non-standard theories: non-expected utility theory in individual decision making; non-exponential discounting models in dynamic decision making; non-Nash behaviour in games; and other-regarding preferences in models of group behaviour. These non-standard theories, while departing from strict concepts of rationality, still embody some notion of rationality, albeit of a weaker form.
The purpose of this proposal is to investigate, within a common framework, a number of these new non-standard theories. Clearly we cannot cover the whole field in a single project, but we can focus on key issues. We propose to test the implications of these theories, and compare their performance with the standard theories. Moreover we propose to explore and test their implications in the context of markets and in the context of institutional design. Our prime empirical tool will be that of experiments, in which the members of the various units of this proposal have a strong comparative advantage compared with others in Italy.
The different units have different interests but there are some common themes. One theme which is of interest to at least three of the units is that of behaviour in dynamic contexts. Earlier economic theories assumed that the preference functionals of decision makers were such that they were never prone to dynamic inconsistencies of various kinds: for example, inconsistencies arising from non-expected utility preferences and from non-exponential discounting, but an increasing amount of empirical literature shows that this assumption is implausible. Accordingly we propose to investigate a number of themes which involve the relaxation of this assumption: these involve trying to ascertain the reasons for these apparent dynamic inconsistencies and to discover what such apparently inconsistent agents do about their apparent inconsistencies.
Another area of concern to at least two of the units is that of decision making under ambiguity, both in static and dynamic contexts and in the context of markets. Extending the existing theory of decision making under ambiguity to a dynamic context is not going to be easy but it will be helped by conducting experiments. From observing behaviour we may be able to formulate new theories. This work is planned to evolve alongside the estimation of preference functionals under ambiguity in a static context - an area in which there is already considerable expertise within the project's units.
Social learning and behaviour in groups is also a common theme. Here we want to explore how information percolates through a group and how group interaction fosters the spread of information. Of particular interest is whether the process of percolation differs if the information is ambiguous.
The project unites five centres in Italy, all with considerable expertise in the running of experiments and the interpretation and application of the results. In several of the centres there are already laboratories in which experiments can be carried out. In addition, LUISS will soon have its own purpose-built laboratory. So this proposal combines facilities, expertise and a Grand Idea - the exploration of non-standard theories of economic behaviour. We expect that this project will contribute to the continued expansion and empirical success of behavioural economics.
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