Psychophysical interpretation for utility measures
AbstractThe paper explores utility measures by combining experiments with mathematical derivations in psychophysics paradigm. The analysis on ultimatum game experiment reveals an evidence for utility threshold and thus supports Bernoulli's utility logarithmic law. Both experimental results and theoretical derivations show that the logarithmic law is suitable for the description of commodity choice and the power law for risk choice. The further mathematical demonstration indicates the logarithmic law for utility scaling to be a Klein-Rubin utility function, a utility function well defined in microeconomics. Based on this, the experimental utility measure is connected with the econometric model Linear Expenditure System, and presents an experimental procedure for testing the utility maximization hypothesis, which will remove a long unsettled perplexity in a fundamental stone of economics since Gossen proposed it in 1854. --
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2011-50.
Date of creation: 2011
Date of revision:
Psychophysics; ultimatum game; utility function; logarithmic law; power law;
Find related papers by JEL classification:
- A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-19 (All new papers)
- NEP-EXP-2011-12-19 (Experimental Economics)
- NEP-NEU-2011-12-19 (Neuroeconomics)
- NEP-UPT-2011-12-19 (Utility Models & Prospect Theory)
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