IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/55706.html
   My bibliography  Save this paper

Problems of utility and prospect theories. A ”certain-uncertain” inconsistency of the random-lottery incentive system

Author

Listed:
  • Harin, Alexander

Abstract

Three main groups of results have been obtained: 1) The question is emphasized whether the probability weighting function W(p) is continuous. If W(p) reveals a discontinuity at p=1, then this is a topological feature. This can qualitatively change (at least) the mathematical aspects of the utility and prospect theories. This is supported by a number of the evidences of the qualitative difference between subjects’ treatments of the probabilities of probable and certain outcomes. 2) Purely mathematical theorems prove (under several conditions) that if the dispersion of data (the noise) is non-zero, then the non-zero discontinuity take place at the probability p=1. 3) In the prevailing random-lottery incentive system of the experiments of the utility and prospect theories, the choices of certain outcomes are stimulated by uncertain lotteries. Because of this evident “certain-uncertain” inconsistency, the deductions from the random-lottery incentive experiments, those include the certain outcomes, cannot be unquestionably correct. The experiment of Starmer and Sugden (1991) evidently supports this consideration.

Suggested Citation

  • Harin, Alexander, 2014. "Problems of utility and prospect theories. A ”certain-uncertain” inconsistency of the random-lottery incentive system," MPRA Paper 55706, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:55706
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/55706/1/MPRA_paper_55706.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Alexander Harin, 2010. "The theorem of existence of ruptures in the probability scale," Economics Bulletin, AccessEcon, vol. 30(2), pages 1-16.
    3. Christian A. Vossler & Maurice Doyon & Daniel Rondeau, 2012. "Truth in Consequentiality: Theory and Field Evidence on Discrete Choice Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(4), pages 145-171, November.
    4. Uri Gneezy & John A. List & George Wu, 2006. "The Uncertainty Effect: When a Risky Prospect is Valued Less than its Worst Possible Outcome," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1283-1309.
    5. Alexander Harin, 2012. "Data Dispersion in Economics (I) - Possibility of Restrictions," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 59-70, August.
    6. Alexander Harin, 2013. "Data dispersion near the boundaries: can it partially explain the problems of decision and utility theories?," Working Papers hal-00851022, HAL.
    7. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    8. Yoram Halevy, 2008. "Strotz Meets Allais: Diminishing Impatience and the Certainty Effect," American Economic Review, American Economic Association, vol. 98(3), pages 1145-1162, June.
    9. Schoemaker, Paul J. H. & Hershey, John C., 1992. "Utility measurement: Signal, noise, and bias," Organizational Behavior and Human Decision Processes, Elsevier, vol. 52(3), pages 397-424, August.
    10. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    11. John D. Hey & Chris Orme, 2018. "Investigating Generalizations Of Expected Utility Theory Using Experimental Data," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 3, pages 63-98, World Scientific Publishing Co. Pte. Ltd..
    12. Kenneth Y. Chay & Patrick J. McEwan & Miguel Urquiola, 2005. "The Central Role of Noise in Evaluating Interventions That Use Test Scores to Rank Schools," American Economic Review, American Economic Association, vol. 95(4), pages 1237-1258, September.
    13. Ian Larkin & Stephen Leider, 2012. "Incentive Schemes, Sorting, and Behavioral Biases of Employees: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 184-214, May.
    14. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience Theory of Choice Under Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1243-1285.
    15. Starmer, Chris & Sugden, Robert, 1991. "Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation," American Economic Review, American Economic Association, vol. 81(4), pages 971-978, September.
    16. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-1280, November.
    17. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 221-234, Winter.
    18. William T. Harbaugh & Kate Krause & Timothy R. Berry, 2001. "GARP for Kids: On the Development of Rational Choice Behavior," American Economic Review, American Economic Association, vol. 91(5), pages 1539-1545, December.
    19. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    20. Loewenstein, George & Thaler, Richard H, 1989. "Intertemporal Choice," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 181-193, Fall.
    21. Tversky, Amos & Thaler, Richard H, 1990. "Anomalies: Preference Reversals," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 201-211, Spring.
    22. 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.
    23. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutström, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June.
    24. David J. Butler & Graham C. Loomes, 2007. "Imprecision as an Account of the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 97(1), pages 277-297, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Harin, Alexander, 2015. "Is Prelec’s function discontinuous at p = 1? (for the Einhorn Award of SJDM)," MPRA Paper 64672, University Library of Munich, Germany.
    2. Harin, Alexander, 2023. "To solve old problems of economics. The experimental background," MPRA Paper 117157, University Library of Munich, Germany.
    3. Harin, Alexander, 2014. "Problems of utility and prospect theories. A discontinuity of Prelec’s function," MPRA Paper 61027, University Library of Munich, Germany.
    4. Harin, Alexander, 2015. "Problems of utility and prospect theories. A “certain–uncertain” inconsistency within their experimental methods," MPRA Paper 67911, University Library of Munich, Germany.
    5. Harin, Alexander, 2014. "Problems of utility and prospect theories. Certainty effect near certainty," MPRA Paper 61026, University Library of Munich, Germany.
    6. Harin, Alexander, 2024. "“Certain-uncertain” inconsistency within the basic experimental procedures of behavioral economics," MPRA Paper 121756, University Library of Munich, Germany.
    7. Alexander Harin, 2024. "About a “Certain-uncertain†Inconsistency within the Generally Accepted Experimental Procedures of Behavioral Economics," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 10(2), pages 17-30, 06-2024.
    8. Harin, Alexander, 2018. "Forbidden zones and biases for the expectation of a random variable. Version 2," MPRA Paper 85607, University Library of Munich, Germany.
    9. Harin, Alexander, 2018. "Forbidden zones for the expectation. New mathematical results for behavioral and social sciences," MPRA Paper 86650, University Library of Munich, Germany.
    10. Harin, Alexander, 2018. "Forbidden zones for the expectation of a random variable. New version 1," MPRA Paper 84248, University Library of Munich, Germany.
    11. Harin, Alexander, 2014. "Is data interpretation in utility and prospect theories unquestionably correct?," MPRA Paper 53880, University Library of Munich, Germany.
    12. Alexander Harin, 2013. "Data dispersion near the boundaries: can it partially explain the problems of decision and utility theories?," Working Papers hal-00851022, HAL.
    13. Harin, Alexander, 2016. "An inconsistency between certain outcomes and uncertain incentives within behavioral methods," MPRA Paper 75311, University Library of Munich, Germany.
    14. Harin, Alexander, 2019. "Forbidden zones for the expectations of measurement data and problems of behavioral economics," MPRA Paper 91368, University Library of Munich, Germany.
    15. Thomas Epper & Helga Fehr-Duda, 2012. "The missing link: unifying risk taking and time discounting," ECON - Working Papers 096, Department of Economics - University of Zurich, revised Oct 2018.
    16. Harin, Alexander, 2018. "Inequalities and zones. New mathematical results for behavioral and social sciences," MPRA Paper 90326, University Library of Munich, Germany.
    17. Harin, Alexander, 2021. "Behavioral economics. Forbidden zones. New method and models," MPRA Paper 106545, University Library of Munich, Germany.
    18. Enrico Diecidue & Peter Wakker & Marcel Zeelenberg, 2007. "Eliciting decision weights by adapting de Finetti’s betting-odds method to prospect theory," Journal of Risk and Uncertainty, Springer, vol. 34(3), pages 179-199, June.
    19. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    20. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, Elisabet E., 2010. "Behavioral econometrics for psychologists," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 553-576, August.

    More about this item

    Keywords

    utility; prospect theory; experiment; incentive; random-lottery incentive system; Prelec; probability weighting function;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:55706. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.