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An Empirical Assessment of Alternative Models of Risky Decision Making

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  • Joanna R. Baker
  • Pamela K. Lattimore
  • Ann D. Witte

Abstract

In this paper, we assess the degree to which four of the most commonly used models of risky decision making can explain the choices individuals make when faced with risky prospects. To make this assessment, we use experimental evidence for two random samples of young adults. Using a robust, nonlinear least squares procedure, we estimate a model that is general enough to approximate Kahnenman and Tversky's prospect theory and that for certain parametric values will yield the expected utility model, a subjective expected utility model and a probability-transform model. We find that the four models considered explain the decision-making behavior of the majority of our subjects. Surprisingly, we find that the choice behavior of the largest number of subjects is consistent with a probability-transform model. Such models have only been developed recently and have not been used in applied settings. We find least support for the expected utility model -- the most widely used model of risky decision making.

Suggested Citation

  • Joanna R. Baker & Pamela K. Lattimore & Ann D. Witte, 1988. "An Empirical Assessment of Alternative Models of Risky Decision Making," NBER Working Papers 2717, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2717
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    1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    2. Sugden, Robert, 1986. "New Developments in the Theory of Choice under Uncertainty," Bulletin of Economic Research, Wiley Blackwell, vol. 38(1), pages 1-24, January.
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