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The hunt for a descriptive theory of choice under risk--A view from the road not taken

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  • Leland, Jonathan

Abstract

In this paper I propose that the development of descriptive theories of choice in economics has been profoundly influenced by an arbitrary and seemly innocuous decision as to how to present risky choices to experimental subjects. This decision to represent lotteries as prospects has lead to a preoccupation with the question of whether preferences conform to what is known as the "independence axiom." Had the profession chosen to represent lotteries in the action-by-state matrices favored by Savage, the independence axiom would have appeared uncontroversial but we would have questioned whether preferences obeyed arguably more fundamental tenets of rationality like transitivity. That different ways of representing lotteries lead to different conclusions regarding which axioms preferences do and don't obey suggests that the choices people make aren't necessarily reflecting properties of their preferences at all. Instead the choices reveal properties of the decision rule individuals use to try to satisfy their preferences - a rule that involves judgments regarding the similarity or dissimilarity of prizes and their associated payoffs across alternatives. The paper discusses how such judgments explain observed behaviors given both prospect and matrix representations of lottery choices as well as explaining anomalies in other choice domains.

Suggested Citation

  • Leland, Jonathan, 2010. "The hunt for a descriptive theory of choice under risk--A view from the road not taken," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(5), pages 568-577, October.
  • Handle: RePEc:eee:soceco:v:39:y:2010:i:5:p:568-577
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    Cited by:

    1. Camilo Fabiam Gómez Segura, Oscar Hernán Cerquera Losada, Cristian Felipe Orjuela Yacue, 2012. "Racionalidad incompleta: una nueva forma de analizar las crisis económicas," REVISTA CIFE, UNIVERSIDAD SANTO TOMÁS, December.
    2. Mareile Drechsler & Konstantinos Katsikopoulos & Gerd Gigerenzer, 2014. "Axiomatizing bounded rationality: the priority heuristic," Theory and Decision, Springer, vol. 77(2), pages 183-196, August.
    3. Nathaniel T. Wilcox, 2017. "Random expected utility and certainty equivalents: mimicry of probability weighting functions," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 3(2), pages 161-173, December.
    4. Jonathan W. Leland & Mark Schneider, 2016. "Salience, Framing, and Decisions under Risk, Uncertainty, and Time," Working Papers 16-08, Chapman University, Economic Science Institute.
    5. Mark Schneider & Jonathan Leland & Nathaniel T. Wilcox, 2016. "Ambiguity Framed," Working Papers 16-11, Chapman University, Economic Science Institute.
    6. Emmanuel PETIT (GREThA, CNRS, UMR 5113) & Anna TCHERKASSOF (LIP/PC2S) & Xavier GASSMANN (INRA), 2011. "Anticipated regret and self-esteem in the Allais paradox," Cahiers du GREThA 2011-25, Groupe de Recherche en Economie Théorique et Appliquée.

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