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Similarity Judgments in Choice Under Uncertainty: A Reinterpretation of the Predictions of Regret Theory

  • Jonathan W. Leland

    (National Science Foundation, 4201 Wilson Boulevard, Room 995, Arlington, Virginia 22230)

The Regret theory of Loomes and Sugden (1982) predicts choice anomalies implied by other alternatives to expected utility (e.g., violations of the independence axiom). It also makes unique and controversial predictions regarding the rational violation of stochastic dominance and invariance. All these predictions depend critically on assumptions regarding the statistical independence or dependence of the available alternatives. None of the predictions depend on the framing or representation of the alternatives. Leland (1994) shows that a model of choice based on similarity judgments predicts choices implied by Regret theory. In contrast to Regret theory, however, these predictions depend critically on the way the choices are framed and not on the dependence or independence of the alternatives. This paper presents experimental results indicating that the frequencies with which violations of independence, dominance, and invariance occur are, in most cases, insensitive to the statistical dependence or independence of the alternatives but sensitive to the way the choices are presented. These findings support the hypothesis that such behaviors arise as a consequence of reliance upon similarity judgments.

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File URL: http://dx.doi.org/10.1287/mnsc.44.5.659
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 44 (1998)
Issue (Month): 5 (May)
Pages: 659-672

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Handle: RePEc:inm:ormnsc:v:44:y:1998:i:5:p:659-672
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  1. Leland, Jonathan W, 1994. "Generalized Similarity Judgments: An Alternative Explanation for Choice Anomalies," Journal of Risk and Uncertainty, Springer, vol. 9(2), pages 151-72, October.
  2. Loomes, Graham, 1988. "Further Evidence of the Impact of Regret and Disappointment in Choice under Uncertainty," Economica, London School of Economics and Political Science, vol. 55(217), pages 47-62, February.
  3. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
  4. Fishburn, P. C., 1981. "An axiomatic characterization of skew-symmetric bilinear functionals, with applications to utility theory," Economics Letters, Elsevier, vol. 8(4), pages 311-313.
  5. Loomes, Graham & Sugden, Robert, 1987. "Testing for Regret and Disappointment in Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 97(388a), pages 118-29, Supplemen.
  6. Loomes, Graham & Sugden, Robert, 1987. "Some implications of a more general form of regret theory," Journal of Economic Theory, Elsevier, vol. 41(2), pages 270-287, April.
  7. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
  8. Conlisk, John, 1989. "Three Variants on the Allais Example," American Economic Review, American Economic Association, vol. 79(3), pages 392-407, June.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  10. Loomes, Graham & Starmer, Chris & Sugden, Robert, 1992. "Are Preferences Monotonic? Testing Some Predictions of Regret Theory," Economica, London School of Economics and Political Science, vol. 59(233), pages 17-33, February.
  11. Rubinstein, Ariel, 1988. "Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?)," Journal of Economic Theory, Elsevier, vol. 46(1), pages 145-153, October.
  12. Starmer, Chris & Sugden, Robert, 1993. "Testing for Juxtaposition and Event-Splitting Effects," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 235-54, June.
  13. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
  14. Mark McCord & Richard de Neufville, 1986. ""Lottery Equivalents": Reduction of the Certainty Effect Problem in Utility Assessment," Management Science, INFORMS, vol. 32(1), pages 56-60, January.
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