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The use of expected value in pricing judgments

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  • Gary Colbert
  • Dennis Murray
  • Robert Nieschwietz

Abstract

Previous research has examined the extent to which decisions made in binary choice situations are consistent with expected value. Li (2003) reports that decisions in multiple-play gambles are well explained by expected value, while single-play gambles are not consistent with expected value. The present study extends previous work by examining the use of expected value in the pricing of gambles. The results show that subjects' pricing decisions are much more consistent with expected value in multiple-play situations than in single-play situations, particularly when the subjects are provided with a simple decision aid (i.e. a very brief description of expected value and the calculated amount of the expected value). Additionally, substantially fewer subjects in our study made decisions consistent with expected value than in Li's (2003) study, suggesting that binary choice studies may overstate the extent of expected value usage.

Suggested Citation

  • Gary Colbert & Dennis Murray & Robert Nieschwietz, 2009. "The use of expected value in pricing judgments," Journal of Risk Research, Taylor & Francis Journals, vol. 12(2), pages 199-208, March.
    • Handle: RePEc:taf:jriskr:v:12:y:2009:i:2:p:199-208
    DOI: 10.1080/13669870802488925
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    References listed on IDEAS

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    1. Robin M. Hogarth & Hillel J. Einhorn, 1990. "Venture Theory: A Model of Decision Weights," Management Science, INFORMS, vol. 36(7), pages 780-803, July.
    2. Shu Li, 2003. "The role of Expected Value illustrated in decision-making under risk: single-play vs multiple-play," Journal of Risk Research, Taylor & Francis Journals, vol. 6(2), pages 113-124, March.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
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