Unexpected Utility: Experimental Tests of Five Key Questions about Preferences over Risk
AbstractExperimental work on preferences over risk has typically considered choices over a small number of discrete options, some of which involve no risk. Such experiments often demonstrate contradictions of standard expected utility theory. We reconsider this literature with a new preference elicitation device that allows a continuous choice space over only risky options. Our analysis assumes only that preferences depend on the probability p and prize x; U = u(p; x): We then allow subjects to choose p and x continuously on a linear budget constraint, r1p + r2x = m, so that all prospects with a nonzero expected value are risky. We test five of the most importantly debated questions about risk preferences: rationality, prospect theory asymmetry, the independence axiom, probability weighting, and constant relative risk aversion. Overall, we find that the expected utility model does unexpectedly well.
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Bibliographic InfoPaper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2010-14.
Date of creation: 01 Sep 2010
Date of revision: 03 Apr 2010
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-EVO-2010-11-27 (Evolutionary Economics)
- NEP-EXP-2010-11-27 (Experimental Economics)
- NEP-UPT-2010-11-27 (Utility Models & Prospect Theory)
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