Resolving Inconsistencies in Utility Measurement Under Risk: Tests of Generalizations of Expected Utility
AbstractThis paper explores inconsistencies that occur in utility measurement under risk when expected utility theory is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studied, prospect theory was the most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect (riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation for the latter observation may be that there was less distortion in probability weighting in the interval [0.10, 0.20] than has commonly been observed.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 53 (2007)
Issue (Month): 3 (March)
utility measurement; nonexpected utility; prospect theory; health;
Other versions of this item:
- Han Bleichrodt & José María Abellán-Perpiñan & JoséLuis Pinto & Ildefonso Méndez-Martínez, 2005. "Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility," Economics Working Papers 798, Department of Economics and Business, Universitat Pompeu Fabra.
- Han Bleichrodt & Jose María Abellán Perpiñán & Jose Luis Pinto-Prades & Ildefonso Méndez-Martínez, 2006. "Resolving Inconsistencies in Utility Measurement under Risk: Tests of Generalizations of Expected Utility," Working Papers 06.19, Universidad Pablo de Olavide, Department of Economics.
- I10 - Health, Education, and Welfare - - Health - - - General
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