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An Intransitive Expectations-Based Bayesian Variant of Prospect Theory

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  • Bordley, Robert F

Abstract

Psychological experiments have established that the classical expected utility model appears descriptively inadequate. Viscusi's prospective reference theory attempts to reconcile the expected utility model with many of these experiments by supposing that individuals have prior expectations about the utility they can expect to get from lottery payoffs. Bayesian theory then implies that individuals revise lottery probabilities in light of these prior expectations before choosing among lotteries so as to maximize expected utility. But Viscusi's theory cannot account for nonmonotonic or intransitive behavior. This article develops an extension of Viscusi's model with correlated prior beliefs that does account for nonmonotonic and intransitive behavior. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Bordley, Robert F, 1992. "An Intransitive Expectations-Based Bayesian Variant of Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 5(2), pages 127-144, May.
    • Handle: RePEc:kap:jrisku:v:5:y:1992:i:2:p:127-44
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    Cited by:

    1. Birnbaum, Michael H. & Gutierrez, Roman J., 2007. "Testing for intransitivity of preferences predicted by a lexicographic semi-order," Organizational Behavior and Human Decision Processes, Elsevier, vol. 104(1), pages 96-112, September.
    2. Michael Birnbaum & Ulrich Schmidt, 2008. "An experimental investigation of violations of transitivity in choice under uncertainty," Journal of Risk and Uncertainty, Springer, vol. 37(1), pages 77-91, August.
    3. Birnbaum, Michael H. & Schmidt, Ulrich, 2006. "Empirical Tests of Intransitivity Predicted by Models of Risky Choice," Economics Working Papers 2006-10, Christian-Albrechts-University of Kiel, Department of Economics.
    4. Matthew S. Wilson, 2018. "Rationality with preference discovery costs," Theory and Decision, Springer, vol. 85(2), pages 233-251, August.
    5. Michael Birnbaum & Ulrich Schmidt, 2010. "Testing transitivity in choice under risk," Theory and Decision, Springer, vol. 69(4), pages 599-614, October.
    6. Erio Castagnoli & Marco LiCalzi, 2005. "Expected utility without utility," Game Theory and Information 0508004, University Library of Munich, Germany.

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