Resolving Inconsistencies in Utility Measurement Under Risk: Tests of Generalizations of Expected Utility
This paper explores inconsistencies that occur in utility measurement under risk when expected utility theory is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studied, prospect theory was the most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect (riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation for the latter observation may be that there was less distortion in probability weighting in the interval [0.10, 0.20] than has commonly been observed.
Volume (Year): 53 (2007)
Issue (Month): 3 (March)
|Contact details of provider:|| Postal: |
Web page: http://www.informs.org/Email:
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
- Philippe Delquié, 1997. ""Bi-Matching": A New Preference Assessment Method to Reduce Compatibility Effects," Management Science, INFORMS, vol. 43(5), pages 640-658, May.
- Philippe Delquié, 1993. "Inconsistent Trade-Offs Between Attributes: New Evidence in Preference Assessment Biases," Management Science, INFORMS, vol. 39(11), pages 1382-1395, November.
- Doctor, Jason N. & Bleichrodt, Han & Miyamoto, John & Temkin, Nancy R. & Dikmen, Sureyya, 2004. "A new and more robust test of QALYs," Journal of Health Economics, Elsevier, vol. 23(2), pages 353-367, March.
- Morrison, Gwendolyn C, 2000. "The Endowment Effect and Expected Utility," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(2), pages 183-97, May.
- John C. Hershey & Paul J. H. Schoemaker, 1985. "Probability Versus Certainty Equivalence Methods in Utility Measurement: Are they Equivalent?," Management Science, INFORMS, vol. 31(10), pages 1213-1231, October.
- Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
- Jonathan Shalev, 1997.
"Loss Aversion Equilibrium,"
Game Theory and Information
9703001, EconWPA, revised 11 Mar 1997.
- SHALEV, Jonathan, 1997. "Loss aversion equilibrium," CORE Discussion Papers 1997023, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- SHALEV, Jonathan, . "Loss aversion equilibrium," CORE Discussion Papers RP -1456, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- José-Luis Pinto-Prades & José-María Abellán-Perpiñán, 2004.
"Mesuring the Health of Populations: The Veil of Ignorance Approach,"
116, Barcelona Graduate School of Economics.
- José-Luis Pinto-Prades & José-Mar�a Abellán-Perpi�án, 2005. "Measuring the health of populations: the veil of ignorance approach," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 69-82.
- Gregory W. Fischer & Ziv Carmon & Dan Ariely & Gal Zauberman, 1999. "Goal-Based Construction of Preferences: Task Goals and the Prominence Effect," Management Science, INFORMS, vol. 45(8), pages 1057-1075, August.
- Camerer, Colin F & Hogarth, Robin M, 1999.
"The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework,"
Journal of Risk and Uncertainty,
Springer, vol. 19(1-3), pages 7-42, December.
- Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences.
- Han Bleichrodt & Ulrich Schmidt, 2002. "A Context-Dependent Model of the Gambling Effect," Management Science, INFORMS, vol. 48(6), pages 802-812, June.
- 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.
- Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
- Bleichrodt, Han, 2001. " Probability Weighting in Choice under Risk: An Empirical Test," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 185-98, September.
- Enrico Diecidue & Ulrich Schmidt & Peter P. Wakker, 2004. "The Utility of Gambling Reconsidered," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 241-259, December.
- Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
- Oliver, Adam, 2003. "The internal consistency of the standard gamble: tests after adjusting for prospect theory," Journal of Health Economics, Elsevier, vol. 22(4), pages 659-674, July.
- Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
- Payne, John W & Bettman, James R & Schkade, David A, 1999. "Measuring Constructed Preferences: Towards a Building Code," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 243-70, December.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- John W. Payne & Dan J. Laughhunn & Roy Crum, 1980. "Translation of Gambles and Aspiration Level Effects in Risky Choice Behavior," Management Science, INFORMS, vol. 26(10), pages 1039-1060, October.
- Quiggin, John & Horowitz, John, 1995. "Time and Risk," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 37-55, January.
- George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:53:y:2007:i:3:p:469-482. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.