Heterogeneity in individual beliefs and its implication for valuing willingness to pay

Abstract

This study conducts an experimental analysis of risky travel choice behaviour, while accounting for the trade-off between attributes, nonlinearity in utility specification and perceptual conditioning. The focus is on empirically measuring between individual heterogeneity in beliefs, and a key finding is that the sampled decision makers are associated with different levels of pessimism. The accommodation of individual beliefs in modelling risky decisions contributes significantly to the explanation of the choice data, relative to the normative Expected Utility Theoretical model which directly uses the probabilities of outcomes and implicitly assumes belief neutrality. The implication of pessimistic beliefs for valuing willingness to pay is illustrated at the individual level.

Keywords

• Decision making under risk
• Choice behaviour
• Belief
• Willingness to pay
• Rank-Dependent Utility Theory