"Lottery Equivalents": Reduction of the Certainty Effect Problem in Utility Assessment
AbstractThis note describes a simple procedure for assessing utility functions which avoids many difficulties of the standard techniques. The conventional methods suffer from at least three drawbacks; they (1) generate utility functions that depend on the probability levels used; (2) chain responses from one question to the next, so that any bias is propagated and even magnified; and (3) change ranges and reference points constantly, introducing range effects and other distortions. Noting the evidence linking the dependence of utility functions on the "certainty effect," our method: (1) compares lotteries with other lotteries rather than certain amounts; (2) does not "chain" responses; and (3) consistently uses "elementary lotteries" which control for range and reference points. Experimental work supports the proposed procedure.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 32 (1986)
Issue (Month): 1 (January)
utility; measurement; certainty effect; certainty equivalent; lottery equivalent;
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