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The Role of Markets in Reducing Expected Utility Violations

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  • Evans, Dorla A

Abstract

Market theories assume that expected utility predicts preferences at the market level even as evidence mounts that it predicts poorly at the individual level. The arguments for better-performing markets are grounded in the assumption that individuals respond to the competition of the market. The objective of this study is to test empirically the validity of those assumptions using the betweenness property of expected utility. The author concludes that expected utility does indeed predict better in markets but analyses suggest that improved performance may be due to the statistical role played by markets introduced by market price selection rules. Copyright 1997 by the University of Chicago.

Suggested Citation

  • Evans, Dorla A, 1997. "The Role of Markets in Reducing Expected Utility Violations," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 622-636, June.
  • Handle: RePEc:ucp:jpolec:v:105:y:1997:i:3:p:622-36
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    References listed on IDEAS

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    1. Camerer, Colin F, 1987. "Do Biases in Probability Judgment Matter in Markets? Experimental Evidence," American Economic Review, American Economic Association, vol. 77(5), pages 981-997, December.
    2. Camerer, Colin & Loewenstein, George & Weber, Martin, 1989. "The Curse of Knowledge in Economic Settings: An Experimental Analysis," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1232-1254, October.
    3. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February.
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    Citations

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    Cited by:

    1. 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.
    2. List, John A. & Mason, Charles F., 2011. "Are CEOs expected utility maximizers?," Journal of Econometrics, Elsevier, vol. 162(1), pages 114-123, May.
    3. Claude Montmarquette & Jacques Robert, 1999. "Sequential Auctions with Multi-Unit Demand: Theory, Experiments and Simulations," CIRANO Working Papers 99s-46, CIRANO.
    4. Steven Gjerstad & Jason M. Shachat, 2007. "Individual Rationality and Market Efficiency," Purdue University Economics Working Papers 1204, Purdue University, Department of Economics.
    5. Gordon Menzies & Daniel Zizzo, 2008. "News And Expectations In Financial Markets: An Experimental Study," CAMA Working Papers 2008-34, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Gijs Kuilen & Peter Wakker, 2006. "Learning in the Allais paradox," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 155-164, December.
    7. Joop Hartog & Ada Ferrer-i-Carbonell & Nicole Jonker, 2000. "On a Simple Survey Measure of Individual Risk Aversion," Tinbergen Institute Discussion Papers 00-074/3, Tinbergen Institute.
    8. Robin Cubitt & Chris Starmer & Robert Sugden, 2001. "Discovered preferences and the experimental evidence of violations of expected utility theory," Journal of Economic Methodology, Taylor & Francis Journals, vol. 8(3), pages 385-414.
    9. Gordon Menzies & Daniel Zizzo, 2007. "Exchange Rate Markets And Conservative Inferential Expectations," CAMA Working Papers 2007-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    10. Cherry, Todd L. & Crocker, Thomas D. & Shogren, Jason F., 2003. "Rationality spillovers," Journal of Environmental Economics and Management, Elsevier, vol. 45(1), pages 63-84, January.
    11. Gode, Dhananjay (Dan) K. & Sunder, Shyam, 2004. "Double auction dynamics: structural effects of non-binding price controls," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1707-1731, July.
    12. Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.
    13. Aurélien Baillon & Han Bleichrodt & Ning Liu & Peter P. Wakker, 2016. "Group decision rules and group rationality under risk," Journal of Risk and Uncertainty, Springer, vol. 52(2), pages 99-116, April.

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