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Is Expected Utility Theory Applicable? A Revealed Preference Test

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  • David R. Just
  • Hikaru Hanawa Peterson

Abstract

We proffer a method to assess the adequacy of expected utility theory (EUT) in empirical studies involving discrete and continuous choices. The method calibrates a utility function to revealed choices and rejects EUT for absurd degrees of implied concavity over the wealth at risk. We find EUT rejections in cases where risk-averse choices are made between gambles with similar stakes, regardless of their absolute sizes. EUT is shown to be applicable only when expected payoffs of gambles are similar, or when more than half of wealth is at risk. We illustrate our method with an application to agricultural production. Copyright 2010, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ajae/aap015
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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 92 (2010)
Issue (Month): 1 ()
Pages: 16-27

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Handle: RePEc:oup:ajagec:v:92:y:2010:i:1:p:16-27

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Cited by:
  1. Moro, Daniele & Sckokai, Paolo, 2013. "The impact of decoupled payments on farm choices: Conceptual and methodological challenges," Food Policy, Elsevier, vol. 41(C), pages 28-38.
  2. Peterson, Hikaru H. & Bernard, John C. & Fox, John A. (Sean) & Peterson, Jeffrey M., 2013. "Japanese Consumers' Valuation of Rice and Pork from Domestic, U.S., and Other Origins," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(1), April.
  3. Franken, Jason R.V. & Pennings, Joost M.E. & Garcia, Philip, 2012. "Measuring Risk Attitude and Relation to Marketing Behavior," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124471, Agricultural and Applied Economics Association.

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