The most downloaded paper; “Preference Cloud Theory: Imprecise Preferences and Preference Reversal” was co-authored by a young promising PhD student, Oben Bayrak. We asked him to tell us more about his work.

Oben BayrakIn order to understand the way economy works, we need to understand how individuals make decisions: how they assess the outcomes and the probabilities and evaluate risks, how they value goods and choose between the available options. We aim to develop a new theoretical understanding of the economic preferences by incorporating the recent evidence, especially about imprecision. Since the topic of the paper targets the fundamentals of economic theory, it offers a wide-range of implications on different sub-disciplines which employ models of economic preferences for risky prospects while analysing the issues in their extent.

This paper presents a new theory for decision under risk that incorporates preference imprecision and is able to explain anomalies such as preference reversals and valuation gap. There is an emerging experimental literature which found that people often exhibit imprecision when stating their choices and valuations. If you are asked to state your subjective value for a good, can you pin your value down to a single precise number? Usually, coming up with a range of possible values is more likely. Our model has two stages; the first stage explains how individuals form these ranges whereas the second stage explains how individuals draw a single value from this range.

electronThe name; Preference Cloud Theory, was inspired by the quantum mechanics’ Electron Cloud Model in which electrons are no longer depicted as particles moving around the nucleus in a well-defined orbit. Instead, their probable location is described as a “cloud”, which represents most probable regions with fuzzy boundaries. The relationship between the classical model of an atom and electron cloud model is analogous to the relationship between the preference models, which assume precision, and our theory.

The illustration is a simplified version so that we better can grasp it. Changes have been made to the original for the same reason. The original comes from Northwestern where David Taylor teaches us about The Life And Death of Stars.