CentER

Bas Donkers

Abstract:

Economists have been rather skeptical towards the use of subjective information. This thesis shows that this type of information can be relevant for the empirical explanation of economic decisions. Three examples of subjective information, which are time preference, income uncertainty, and risk aversion, are studied extensively in this thesis. The models used in the analyses of the subjective information are based on models developed by economic psychologists. These models are different from the traditional discounted expected utility model most often used in economics. The major differences are the presence of loss aversion and probability weighting. An economic model that incorporates these differences is used to explain the equity premium puzzle.