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Probabilities vs Money: A Test of Some Fundamental Assumptions about Rational Decision Making

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  • Loomes, Graham

Abstract

This paper describes an experiment where respondents were asked to tackle two decision tasks which were very similar in structure but which differed in that one problem involved direct money payoffs while the other involved payoffs in the form of probabilities of winning a given sum of money. According to most decision models, most risk averse individuals might be expected to behave quite differently under the two conditions. But the behavior actually observed does not accord with this expectation. The paper discusses possible reasons for this and the potential implications of such findings.

Suggested Citation

  • Loomes, Graham, 1998. "Probabilities vs Money: A Test of Some Fundamental Assumptions about Rational Decision Making," Economic Journal, Royal Economic Society, vol. 108(447), pages 477-489, March.
  • Handle: RePEc:ecj:econjl:v:108:y:1998:i:447:p:477-89
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    Citations

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    Cited by:

    1. A. Rubinstein, 2000. "A,A,A,A,A or A,A,B,C,D? Over-Diversification in Repeated Decision Problems," Princeton Economic Theory Papers 00s13, Economics Department, Princeton University.
    2. Albert Burgos, 2002. "Learning to deal with risk: what does reinforcement learning tell us about risk attitudes?," Economics Bulletin, AccessEcon, vol. 4(10), pages 1-13.
    3. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 5-27, June.
    4. Butler, D. J., 2000. "Do non-expected utility choice patterns spring from hazy preferences? An experimental study of choice 'errors'," Journal of Economic Behavior & Organization, Elsevier, vol. 41(3), pages 277-297, March.
    5. Peter Wakker & Veronika Köbberling & Christiane Schwieren, 2007. "Prospect-theory’s Diminishing Sensitivity Versus Economics’ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically," Theory and Decision, Springer, vol. 63(3), pages 205-231, November.
    6. Burgos, Albert, 1999. "Learning to deal with risk: what does reinforcement learning tell us about risk atittudes?," UC3M Working papers. Economics 6152, Universidad Carlos III de Madrid. Departamento de Economía.
    7. Di Caprio, Debora & Santos-Arteaga, Francisco J., 2011. "Cardinal versus ordinal criteria in choice under risk with disconnected utility ranges," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 588-594.
    8. repec:ebl:ecbull:v:4:y:2002:i:10:p:1-13 is not listed on IDEAS
    9. Paul J. Healy & Yaron Azrieli & Christopher P. Chambers, 2016. "Incentives in Experiments: A Theoretical Analysis," Working Papers 16-03, Ohio State University, Department of Economics.
    10. repec:eee:eecrev:v:98:y:2017:i:c:p:1-31 is not listed on IDEAS
    11. Rubinstein, Ariel, 2002. "Irrational diversification in multiple decision problems," European Economic Review, Elsevier, vol. 46(8), pages 1369-1378, September.
    12. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, vol. 113(490), pages 920-947, October.

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