The prize is awarded to the Canadian economist with the best research record during the last five years
June 2020
A professor and the director of the Toronto Experimental Economics Laboratory based in U of T’s economics department, Yoram Halevy has research interests in individual and strategic decision-making. He uses theoretical and experimental tools to examine what constitutes so-called ‘rational’ behaviour, and investigates how (bounded) rationality is revealed in various environments. Bounded rationality emphasizes that when individuals make decisions, rationality is necessarily limited by the tractability of the problem, human cognitive constraints, and the time available in which the decision must be made.
The prize is awarded bi-annually by the Canadian Economics Association (CEA) to the Canadian economist with the best research record during the last five years. Halevy, reflecting on the 19th-century economist after whom the prize is named, comments that “it is fortuitous that John Rae acknowledged the importance of uncertainty for temporal choice problems, a topic that I have investigated in several of my papers that demonstrate how time inconsistency relates to the perception of the future as uncertain.”
Noting Halevy’s “stellar research record in investigating deviations from standard rationality”, the John Rae Prize’s awarding committee commented that “his work is exemplary in mapping rigorous theoretical foundations to implications for both experiments and observational data.” The committee also remarked on Halevy’s impressive publication record, adding that “the actual quality of these papers matches the prestigious nature of the outlets” in which they appear. The list of publications is a veritable ‘who’s who’ of economics journals and includes Econometrica, Experimental Economics, Journal of Economic Behavior and Organization, Journal of Political Economy, Quantitative Economics, Review of Economic Studies, and American Economic Review: Insights. “I was extremely fortunate to collaborate during the award period with an exceptional group of researchers,” Halevy says. “In particular, I appreciate the opportunity to co-author with all my PhD advisees. I am privileged, too, to be part of a research-enabling community, and surrounded by first-rate colleagues at the University of Toronto.”
The award committee draw special attention to the contributions made by Halevy’s papers in Econometrica, Journal of Political Economy and Review of Economic Studies. We take a brief tour through them here, to highlight what the committee describes as Halevy’s “coherent, energetic and insightful program of exploration of bounded rationality that has attracted international attention.”
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Econometrica (2015), 83 (1), 335-352 |
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“Time Consistency: Stationarity and Time Invariance” |
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CEA Committee: “Is well-known as it applies a novel insight that some of the apparent choice reversals observed in experiments can actually be attributed to time varying preferences. This involves carefully defining the relevant concepts and clever, illuminating experiments.” |
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To perform and analyze a dynamic preference reversal experiment, the standard framework of preferences over temporal payments is extended to a dated collection of such preferences. This extension allows the definition of three distinct properties. Stationarity implies that ranking of temporal payments depends only on the time distance and payment distance between the alternatives. Time invariance assumes that the decision maker evaluates each temporal payment relative to the evaluation period. A decision maker is time consistent if all her temporal preferences agree on the ranking of alternatives. It is first shown that any two properties imply the third. Since the goal is to understand the dynamic structure of temporal preferences, these three components must be measured simultaneously.
The experiment that follows uses the classroom as a field: it is an environment in which transaction costs are minimal and the risk that the experimenter will default on his future commitments is easier to eliminate. Each subject is asked a series of incentive compatible questions with a goal to measure the three dimensions of her intertemporal preferences described above. It is found that at least half of the subjects make time consistent choices, and about half of the subjects who are time-inconsistent have stationary preferences. These findings challenge the view that present-bias preferences are the main source of time-inconsistent choices. |
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Journal of Political Economy (2018), 126 (4), 1558-1593 |
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“Parametric Recoverability of Preferences” (with Dotan Persitz and Lanny Zrill) |
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CEA Committee: “An important re-examination of an old question relating to the connection between data and utility functions. The authors decompose the disagreement between any particular parametric utility function and the data into a component that is disagreement between the data and any possibly over-parameterized utility function, and a component that has to do with the specified parametric class. This approach applies an intuitively appealing money metric utility. They show their decomposition has desirable empirical properties.” |
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The paper studies the problem of recovering preferences from individual choices. The renewed interest in this problem emerges from the recent availability of relatively large data sets (experimental and observational) composed of individual choices made from linear budget sets. These rich data sets allow researchers to recover approximate individual stable utility functions and report the magnitude and distribution of behavioral characteristics in the population.
The paper brings revealed preference theory to bear on the problem of recovering approximate stable parametric preferences from consistent and inconsistent consumer choices. It proposes measures of the incompatibility between the revealed preference ranking implied by choices and the ranking induced by the considered parametric preferences. These incompatibility measures are proven to characterize well-known inconsistency indices. They advocate a recovery approach that is based on such incompatibility measures, and demonstrate its applicability for misspecification measurement and model selection. Using an innovative experimental design, the authors empirically substantiate that the proposed revealed-preference-based method predicts choices significantly better than a standard distance-based method. |
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Review of Economic Studies (2019), 86 (2), 668-693 |
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“Ambiguous Correlation” (with Larry G. Epstein) |
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CEA Committee: “The simple, appealing core idea: What if you have ambiguity aversion to correlation between two urns?* In addition to ambiguity aversion to the distribution within each urn? The authors show this effect can be identified in ingenious experiments and investigate the theoretical basis.” |
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The authors write: “Many decisions are made in environments where outcomes are determined by the realization of multiple random events. A decision maker may be uncertain how these events are related. We identify and experimentally substantiate behavior that intuitively reflects a lack of confidence in their joint distribution. Our findings suggest a dimension of ambiguity which is different from that in the classical distinction between risk and ‘Knightian uncertainty.’
“We consider a setting where there are two urns and you are told the same about the composition of each, so that you have no reason to distinguish between them. However, you are told very little; for example, only that each urn contains two balls each of which is either red or black. Accordingly, you are not given any reason to be certain that the compositions are identical, nor are you given any reason for being confident that the urns’ compositions are unrelated or related in any particular way. We study choices between bets on the colors of two balls, where simultaneously one ball is drawn from each urn, and we identify behavior that intuitively reveals a lack of confidence concerning the relation between the urns. The key idea is that ambiguity about how the compositions of the two urns might differ or be related is not relevant to bets on a single urn. This leads us to focus on the choice between bets on the color of the ball drawn from one urn versus bets on the colors of the balls drawn from both urns (specifically, on whether the two balls have the same color, or whether they have different colors). The behavior we identify is then tested in a controlled laboratory experiment which provides evidence of sensitivity to the lack of information concerning the relation between the urns’ compositions. By considering also bets on an urn known to contain an equal number of red and black balls, we find that this new form of ambiguity aversion is only partially related to Knightian ambiguity aversion as measured in Ellsberg’s experiment, and we study at a behavioral level the three-fold distinction between risk, uncertain bias (or composition) and the uncertain relation between biases.” * In Ellsberg’s (1961) classic two-urn thought experiment, there are two urns, each containing 100 balls that are either red or black. You are told the exact color composition for one (50-50), the risky urn, and nothing at all about the composition of the other one, the ambiguous urn. Intuition suggests, and many subsequent laboratory experiments confirm, that many people prefer to bet on drawing red (black, respectively) from the risky urn as opposed to from the ambiguous urn, thereby demonstrating a behavioral distinction between risk (known composition) and Knightian uncertainty (unknown bias or composition). |
About the John Rae Prize
Established in 1994 to recognize research excellence in the recent past, the prize is awarded every second year to the Canadian economist with the best research record over the previous five years.
The award is named for John Rae, who was born in 1796 in Scotland and who did most of his work in Canada. He was a genuine precursor of endogenous growth theory. The decision on the award recipient is made by a three-person committee, appointed by the president of the CEA in consultation with other members of the association’s executive. In 2020, the committee members were Siwan Anderson, Fabian Lange and Arthur Robson.
Article prepared with files from Yoram Halevy
