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On the potential for observational equivalence in experiments on risky choice when a power value function is assumed

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  • Peel, D.A.
  • Zhang, Jie

Abstract

We demonstrate theoretically and illustrate the implications of assuming power utility when the true function is of the expo-power form. Empirical results can appear to be consistent with cumulative prospect theory when they are in fact generated from a Markowitz model.

Suggested Citation

  • Peel, D.A. & Zhang, Jie, 2012. "On the potential for observational equivalence in experiments on risky choice when a power value function is assumed," Economics Letters, Elsevier, vol. 116(1), pages 8-10.
  • Handle: RePEc:eee:ecolet:v:116:y:2012:i:1:p:8-10
    DOI: 10.1016/j.econlet.2011.12.116
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    References listed on IDEAS

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    1. Weber, Bethany J. & Chapman, Gretchen B., 2005. "Playing for peanuts: Why is risk seeking more common for low-stakes gambles?," Organizational Behavior and Human Decision Processes, Elsevier, vol. 97(1), pages 31-46, May.
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    More about this item

    Keywords

    Cumulative prospect theory; Power value function; Markowitz model; Expo-value utility function; Probability distortion; Lotteries;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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