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Lottery Qualities

  • Yves Alarie
  • Georges Dionne

The aim of this paper is to propose a model of decision-making for lotteries. Lottery qualities are the key concepts of the theory. Qualities allow the derivation of optimal decision-making processes and are taken explicitly into account for lottery evaluation. Our contribution explains the major violations of the expected utility theory for decisions on two-point lotteries and shows the necessity of giving explicit consideration to lottery qualities. Judged certainty equivalent and choice certainty equivalent concepts are discussed in detail along with the comparison of lotteries. Examples are provided by using different test results in the literature.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0617.

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Date of creation: 2006
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Handle: RePEc:lvl:lacicr:0617
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  1. Alarie, Yves & Dionne, Georges, 2001. " Lottery Decisions and Probability Weighting Function," Journal of Risk and Uncertainty, Springer, vol. 22(1), pages 21-33, January.
  2. Tversky, Amos & Slovic, Paul & Kahneman, Daniel, 1990. "The Causes of Preference Reversal," American Economic Review, American Economic Association, vol. 80(1), pages 204-17, March.
  3. John Leland, 2010. "Generalized Similarity Judgments: An Alternative Explanation for Choice Anomalies," Levine's Working Paper Archive 7644, David K. Levine.
  4. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
  5. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  7. McFadden, Daniel, 1999. "Rationality for Economists?," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 73-105, December.
  8. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
  9. Bostic, Raphael & Herrnstein, R. J. & Luce, R. Duncan, 1990. "The effect on the preference-reversal phenomenon of using choice indifferences," Journal of Economic Behavior & Organization, Elsevier, vol. 13(2), pages 193-212, March.
  10. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  11. Luce, R Duncan & Mellers, Barbara A & Chang, Shi-jie, 1993. " Is Choice the Correct Primitive? On Using Certainty Equivalents and Reference Levels to Predict Choices among Gambles," Journal of Risk and Uncertainty, Springer, vol. 6(2), pages 115-43, April.
  12. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
  13. 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.
  14. Yves Alarie & Georges Dionne, 2004. "On the Necessity of Using Lottery Qualities," Cahiers de recherche 0415, CIRPEE.
  15. Ranyard, Rob, 1995. "Reversals of Preference between Compound and Simple Risks: The Role of Editing Heuristics," Journal of Risk and Uncertainty, Springer, vol. 11(2), pages 159-75, September.
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