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Psychophysical interpretation for utility measures

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  • He, Yuqing
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    Abstract

    The paper explores utility measures by combining experiments with mathematical derivations in the psychophysics paradigm. The analysis on the ultimatum game experiment reveals evidences for the utility threshold and thus supports Bernoulli's utility logarithmic law. Both experimental results and theoretical derivations show that the logarithmic law is suitable for the description of commodity choice and the power law for risk choice. The further mathematical demonstration indicates the logarithmic law for utility scaling to be a KleinRubin utility function, a utility function well defined in microeconomics. Based on this, the experimental utility measure is connected with the econometric model Linear Expenditure System, and presents an experimental procedure for testing the utility maximization hypothesis, which will resolve a long unsettled perplexity in a fundamental stone of economics since Gossen proposed it in 1854. --

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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2012-29
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    File URL: http://econstor.eu/bitstream/10419/60226/1/720191475.pdf
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    Bibliographic Info

    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 6 (2012)
    Issue (Month): 29 ()
    Pages: 1-35

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    Handle: RePEc:zbw:ifweej:201229

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    Related research

    Keywords: psychophysics; ultimatum game; utility function; logarithmic law; power law;

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    1. Hoffman, Elizabeth & McCabe, Kevin A & Smith, Vernon L, 1996. "On Expectations and the Monetary Stakes in Ultimatum Games," International Journal of Game Theory, Springer, vol. 25(3), pages 289-301.
    2. George J. Stigler, 1950. "The Development of Utility Theory. II," Journal of Political Economy, University of Chicago Press, vol. 58, pages 373.
    3. Cameron, Lisa A, 1999. "Raising the Stakes in the Ultimatum Game: Experimental Evidence from Indonesia," Economic Inquiry, Western Economic Association International, vol. 37(1), pages 47-59, January.
    4. Stephen W. Rousseas & Albert G. Hart, 1951. "Experimental Verification of a Composite Indifference Map," Journal of Political Economy, University of Chicago Press, vol. 59, pages 288.
    5. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
    7. Guth, Werner, 1995. "On ultimatum bargaining experiments -- A personal review," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 329-344, August.
    8. Frederick Mosteller & Philip Nogee, 1951. "An Experimental Measurement of Utility," Journal of Political Economy, University of Chicago Press, vol. 59, pages 371.
    9. Robert Slonim & Alvin E. Roth, 1998. "Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic," Econometrica, Econometric Society, vol. 66(3), pages 569-596, May.
    10. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    11. John List & Todd Cherry, 2000. "Learning to Accept in Ultimatum Games: Evidence from an Experimental Design that Generates Low Offers," Experimental Economics, Springer, vol. 3(1), pages 11-29, June.
    12. MacCrimmon, K R & Toda, M, 1969. "The Experimental Determination of Indifference Curves," Review of Economic Studies, Wiley Blackwell, vol. 36(108), pages 433-51, October.
    13. Straub, Paul G. & Murnighan, J. Keith, 1995. "An experimental investigation of ultimatum games: information, fairness, expectations, and lowest acceptable offers," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 345-364, August.
    14. Lluch, Constantino, 1973. "The extended linear expenditure system," European Economic Review, Elsevier, vol. 4(1), pages 21-32, April.
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