Substantive and Procedural Rationality in Decisions under Uncertainty∗

We report a laboratory experiment that enables us to study systematically the substantive and procedural rationality of decision making under uncertainty. By using novel graphical representations of budget sets over bundles of state-contingent commodities, we generate a very rich data set well-suited to studying behavior at the level of the individual subject. We test the data for consistency with the maximization hypothesis, and we recover underlying preferences using both ∗This research was supported by the Experimental Social Science Laboratory (X-Lab) at UC Berkeley. We are grateful to David Ahn, Jim Andreoni, Colin Camerer, Liran Einav, Tom Palfrey, Ariel Rubinstein and Andy Schotter for helpful discussions. This paper has also benefited from suggestions by the participants of seminars at several universities. We would also like to thank Brenda Naputi and Lawrence Sweet from the X-Lab for their valuable assistance, and Roi Zemmer for writing the computer programs. We acknowledge the Center on the Economics and Demography of Aging (CEDA) at UC Berkeley for financial support. Kariv is grateful to the hospitality of the Institute for Advances Studies School of Social Science. †Department of Economics, New York University, 110 Fifth Ave., 5th Floor, New York, NY, 10011 (e-mail: [email protected], url: http://homepages.nyu.edu/~sc743/). ‡Graduate School of Business, Columbia University, Uris 823, New York, NY 10027 (E-mail: [email protected], URL: http://www-1.gsb.columbia.edu/faculty/rfisman/). §Department of Economics, New York University, 110 Fifth Ave., 5th Floor, New York, NY, 10011 (e-mail: [email protected], url: http://www.econ.nyu.edu/user/galed). ¶Department of Economics, University of California, Berkeley, Evans Hall # 3880, Berkeley, CA 94720 (e-mail: [email protected], url: http://socrates.berkeley.edu/~kariv/).