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"Lottery Equivalents": Reduction of the Certainty Effect Problem in Utility Assessment


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  • Mark McCord

    (Ohio State University, Columbus, Ohio 43210)

  • Richard de Neufville

    (Technology and Policy Program, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

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    This 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 Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 32 (1986)
    Issue (Month): 1 (January)
    Pages: 56-60

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    Handle: RePEc:inm:ormnsc:v:32:y:1986:i:1:p:56-60

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    Keywords: utility; measurement; certainty effect; certainty equivalent; lottery equivalent;


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