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Nonlinear Preferences and Two-Stage Lotteries: Theories and Evidence

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  • Bernasconi, Michele

Abstract

Nonlinear preferences models are theories for choice under risk which have weakened in one way or another the Independence Axiom of Expected Utility. In this paper we present an experiment designed to discriminate between some basic ideas in this literature. We tested the Betweenness axiom, a weaker form of Independence, against an alternative which predicts that indifference curves in the probabilities simplex are convex along the lower edge and concave along the hypotenuse. We also checked whether preferences among single-stage lotteries, as those revealed by our test of Betweenness, should be extended to preferences among two-stage lottery via the classical Reduction of Compound Lottery axiom or via the Certainty Equivalent Mechanism. Copyright 1994 by Royal Economic Society.

Suggested Citation

  • Bernasconi, Michele, 1994. "Nonlinear Preferences and Two-Stage Lotteries: Theories and Evidence," Economic Journal, Royal Economic Society, vol. 104(422), pages 54-70, January.
  • Handle: RePEc:ecj:econjl:v:104:y:1994:i:422:p:54-70
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    Cited by:

    1. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    2. Nathalie Etchart, 2002. "Adequate Moods for non-eu Decision Making in a Sequential Framework," Theory and Decision, Springer, vol. 52(1), pages 1-28, February.
    3. Blavatskyy, Pavlo R., 2006. "Violations of betweenness or random errors?," Economics Letters, Elsevier, vol. 91(1), pages 34-38, April.
    4. Maria J. Ruiz Martos, 2017. "Individual Dynamic Choice Behaviour and the Common Consequence Effect," ThE Papers 17/01, Department of Economic Theory and Economic History of the University of Granada..
    5. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.
    6. Pavlo Blavatskyy, 2004. "Axiomatization of a Preference for Most Probably Winner," CERGE-EI Working Papers wp226, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    7. Pavlo R. Blavatskyy, "undated". "A Stochastic Expected Utility Theory," IEW - Working Papers 231, Institute for Empirical Research in Economics - University of Zurich.
    8. Navarro-Martinez, Daniel & Loomes, Graham & Isoni, Andrea & Butler, David & Alaoui, Larbi, 2017. "Boundedly Rational Expected Utility Theory," MPRA Paper 79893, University Library of Munich, Germany.
    9. Robin Cubitt & Chris Starmer & Robert Sugden, 1998. "On the Validity of the Random Lottery Incentive System," Experimental Economics, Springer;Economic Science Association, vol. 1(2), pages 115-131, September.
    10. Pavlo R. Blavatskyy, 2010. "Modifying the Mean-Variance Approach to Avoid Violations of Stochastic Dominance," Management Science, INFORMS, vol. 56(11), pages 2050-2057, November.
    11. Bruno S. Frey, "undated". "Knight Fever towards an Economics of Awards," IEW - Working Papers 239, Institute for Empirical Research in Economics - University of Zurich.
    12. Pavlo R. Blavatskyy, "undated". "Axiomatization of a Preference for Most Probable Winner," IEW - Working Papers 230, Institute for Empirical Research in Economics - University of Zurich.
    13. Blavatskyy, Pavlo, 2016. "Probability weighting and L-moments," European Journal of Operational Research, Elsevier, vol. 255(1), pages 103-109.
    14. Astrid Hopfensitz & Frans Winden, 2008. "Dynamic Choice, Independence and Emotions," Theory and Decision, Springer, vol. 64(2), pages 249-300, March.
    15. Michele Bernasconi, 2002. "How should income be divided? questionnaire evidence from the theory of “Impartial preferences”," Journal of Economics, Springer, vol. 9(1), pages 163-195, December.
    16. Nathalie Etchart(-Vincent), 2005. "Adequate Moods for Non-EU Decision Making in a Sequential Framework," Working Papers halshs-00004832, HAL.
    17. Pavlo Blavatskyy, 2007. "Stochastic expected utility theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 259-286, June.
    18. repec:kap:theord:v:84:y:2018:i:1:d:10.1007_s11238-017-9629-5 is not listed on IDEAS
    19. Pavlo R. Blavatskyy, 2016. "A monotone model of intertemporal choice," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 785-812, October.
    20. Liang Zou, 2006. "An Alternative to Prospect Theory," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 1-28, May.
    21. Galizzi, Matteo M. & Machado, Sara R. & Miniaci, Raffaele, 2016. "Temporal stability, cross-validity, and external validity of risk preferences measures: experimental evidence from a UK representative sample," LSE Research Online Documents on Economics 67554, London School of Economics and Political Science, LSE Library.

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