IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

An Experimental Test for Stability of the Transformation Function in Rank-Dependent Expected Utility Theory and Order-Dependent Present Value Theory

Listed author(s):
  • Gary Gigliotti


    (Rutgers University)

  • Barry Sopher


    (Rutgers University)

We propose and analyze a generalization of present value maximization, "time-order dependent present value (TODPV)," for intertemporal income choice. The model is analagous to the rank dependent expected utility model (RDEU) for choice under risk. The main feature of interest in the model is the "payment transformation function," which operates on proportions of a fixed total of payments just as the probability weighting function in RDEU operates on probabilities. These models can accomodate many choice patterns, for both risky and intertemporal choice, so we conduct experiments in an attempt to (i) measure the structure of preferences over lotteries and intertemporal income streams and (ii) test for stability of the probability and payment transformation functions over different choice sets. The design is based on manipulations of the "probability triangle" and the "intertemporal choice triangle." If, as in many previous studies of the RDEU model, a representative agent approach is taken, then the average preference structure in both the domain of risky choice and the domain of intertermporal choice can be characterized as "homothetic" in the respective choice triangles. This implies a strictly concave transformation function, and is at odds witht the finding of an "inverted S" shaped function that many researchers have suggested for the RDEU model. Individual analysis reveals considerable heterogeneity of preferences. A disaggregated analysis in which we classify subjects according to which transformation function is most consistent with their revealed choice behavior shows that a linear and a strictly concave transformation function are the most common for both risky choice and for intertemporal choice. Direct estimation of the transformation function is consistent with this classification. In particular, there is no evidence of an inverted S-shaped transformation function for choice under risk, contrary to several previous studies. The difference between our results and those of previous studies can be mainly attributed to the choice of functional forms used in estimating the transformation function, or to the limited space of lotteries upon which estimates have been based.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199826.

in new window

Date of creation: 19 Oct 1998
Handle: RePEc:rut:rutres:199826
Contact details of provider: Postal:
New Jersey Hall - 75 Hamilton Street, New Brunswick, NJ 08901-1248

Phone: (732) 932-7363
Fax: (732) 932-7416
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:rut:rutres:199826. 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: ()

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.