AbstractThe aim of this paper is to propose a model of decision-making for lotteries. Lottery qualities are the key concepts of the theory. Qualities allow the derivation of optimal decision-making processes and are taken explicitly into account for lottery evaluation. Our contribution explains the major violations of the expected utility theory for decisions on two-point lotteries and shows the necessity of giving explicit consideration to lottery qualities. Judged certainty equivalent and choice certainty equivalent concepts are discussed in detail along with the comparison of lotteries. Examples are provided by using different test results in the literature.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0617.
Date of creation: 2006
Date of revision:
Lottery choice; common ratio; preference reversal; pricing; lottery test; cognitive process; certainty equivalent;
Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-20 (All new papers)
- NEP-CBE-2006-05-20 (Cognitive & Behavioural Economics)
- NEP-UPT-2006-05-20 (Utility Models & Prospect Theory)
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