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An Experimental Investigation of the Role of Errors for Explaining Violations of Expected Utility

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  • Schmidt, Ulrich
  • Neugebauer, Tibor

Abstract

One possible conclusion from recent experimental research on decision making under risk is that observed behaviour can be reasonable accommodated by expected utility plus an error term. This conclusion implies that the violation rate of expected utility should decrease if errors are excluded. The present paper presents an experiment which investigates this implication. Indeed, the results show that the exclusion of errors leads to a significant reduction of the violation rate for most of the subjects and most of the choice problems under risk. However, it turns out that for decision problems under ambiguity the exclusion of errors in contrast increases the violation rate significantly. In this sense the Ellsberg paradox can be regarded as a more serious challenge of expected utility than the Allais paradox. More general, while expected utility plus error term may be regarded as a reasonable representation for choice under risk this does not seem to be true for ambiguous choice problems.

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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-279.

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Length: 14 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:han:dpaper:dp-279

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Keywords: expected utility; choice errors; Allais paradox; Ellsberg paradox;

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References

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  1. Loomes, Graham & Moffatt, Peter G & Sugden, Robert, 2002. " A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 103-30, March.
  2. Hey, John D., 1995. "Experimental investigations of errors in decision making under risk," European Economic Review, Elsevier, vol. 39(3-4), pages 633-640, April.
  3. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  4. Carbone, Enrica & Hey, John D, 2000. " Which Error Story Is Best?," Journal of Risk and Uncertainty, Springer, vol. 20(2), pages 161-76, March.
  5. Ballinger, T Parker & Wilcox, Nathaniel T, 1997. "Decisions, Error and Heterogeneity," Economic Journal, Royal Economic Society, vol. 107(443), pages 1090-1105, July.
  6. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
  7. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
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Cited by:
  1. Tibor Neugebauer & Javier Perote & Ulrich Schmidt & Malte Loos, 2005. "Selfish-biased conditional cooperation: On the decline of contributions in repeated public goods experiments," Experimental 0503009, EconWPA.

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