Han Bleichrodt () (Erasmus University, Rotterdam) Jose María Abellán Perpiñán () (University of Murcia) Jose Luis Pinto-Prades () (Department of Economics, Universidad Pablo de Olavide) Ildefonso Méndez-Martínez () (University of Murcia)
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This paper explores inconsistencies that occur in utility measurement under risk when expected utility is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studied, prospect theory was the most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect (riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation for the latter observation may be that there was less distortion in probability weighting in the interval [0.10, 0.20] than has commonly been observed.
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Paper provided by Universidad Pablo de Olavide, Departamento de Economía in its series Working Papers with number
06.19.
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