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Different methods to define utility functions yield different results and engage different neural processes

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  • Heldmann, Marcus

    (Otto-von-Guericke University Magdeburg)

  • Vogt, Bodo

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Heinze, Hans-Jochen

    (Otto-von-Guericke University Magdeburg)

  • Münte, Thomas

    (Otto-von-Guericke University Magdeburg)

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    Abstract

    Although the concept of utility is fundamental to many economic theories, up to now a generally accepted method determining a subject’s utility function is not available. We investigated two methods that are used in economic sciences for describing utility functions by using response-locked event-related potentials in order to assess their neural underpinnings. For defining the certainty equivalent (CE), we used a lottery game with probabilities of 0.5, for identifying the subjects’ utility functions directly a standard bisection task was applied. Although the lottery tasks’ payoffs were only hypothetical, a pronounced negativity was observed resembling the error related negativity (ERN) previously described in action monitoring research, but this occurred only for choices far away from the indifference point between money and lottery. By contrast, the bisection task failed to evoke an ERN irrespective of the responses’ correctness. Based on these findings we are reasoning that only decisions made in the lottery task achieved a level of subjective relevance that activates cognitive-emotional monitoring. In terms of economic sciences, our findings support the view that the bisection method is unaffected by any kind of probability valuation or other parameters related to risk and in combination with the lottery task can, therefore, be used to differentiate between payoff and probability valuation.

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    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2009_Dateien/2009_14.pdf
    File Function: First version, 2009
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    Bibliographic Info

    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 09014.

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    Length: 13 pages
    Date of creation: May 2009
    Date of revision:
    Handle: RePEc:mag:wpaper:09014

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    Related research

    Keywords: Utility function; neuroeconomics; error-related negativity; executive functions; cognitive electrophysiology; lottery; bisection;

    This paper has been announced in the following NEP Reports:

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    1. Wulf Albers & Robin Pope & Reinhard Selten & Bodo Vogt, 1999. "Experimental Evidence for Attractions to Chance," Working Papers 317, Bielefeld University, Center for Mathematical Economics.
    2. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    3. 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.
    4. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
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