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Probabilities vs Money: A Test of Some Fundamental Assumptions about Rational Decision Making

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  • Loomes, Graham
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    Abstract

    This paper describes an experiment where respondents were asked to tackle two decision tasks which were very similar in structure but which differed in that one problem involved direct money payoffs while the other involved payoffs in the form of probabilities of winning a given sum of money. According to most decision models, most risk averse individuals might be expected to behave quite differently under the two conditions. But the behavior actually observed does not accord with this expectation. The paper discusses possible reasons for this and the potential implications of such findings.

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    Bibliographic Info

    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 108 (1998)
    Issue (Month): 447 (March)
    Pages: 477-89

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    Handle: RePEc:ecj:econjl:v:108:y:1998:i:447:p:477-89

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    Cited by:
    1. Rubinstein, A., 2000. "A,A,A,A,A or A,A,B,C,D? Over-Diversification in Repeated Decision Problems," Papers 2000-10, Tel Aviv.
    2. Rubinstein, Ariel, 2002. "Irrational diversification in multiple decision problems," European Economic Review, Elsevier, vol. 46(8), pages 1369-1378, September.
    3. Butler, D. J., 2000. "Do non-expected utility choice patterns spring from hazy preferences? An experimental study of choice 'errors'," Journal of Economic Behavior & Organization, Elsevier, vol. 41(3), pages 277-297, March.
    4. Peter Wakker & Veronika Köbberling & Christiane Schwieren, 2007. "Prospect-theory’s Diminishing Sensitivity Versus Economics’ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically," Theory and Decision, Springer, vol. 63(3), pages 205-231, November.
    5. repec:ebl:ecbull:v:4:y:2002:i:10:p:1-13 is not listed on IDEAS
    6. Vital Anderhub & Simon Gaechter & Manfred Koenigstein, . "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," IEW - Working Papers 018, Institute for Empirical Research in Economics - University of Zurich.
    7. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, vol. 113(490), pages 920-947, October.
    8. Albert Burgos, 2002. "Learning to deal with risk: what does reinforcement learning tell us about risk attitudes?," Economics Bulletin, AccessEcon, vol. 4(10), pages 1-13.
    9. Di Caprio, Debora & Santos-Arteaga, Francisco J., 2011. "Cardinal versus ordinal criteria in choice under risk with disconnected utility ranges," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 588-594.

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