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Psychophysical interpretation for utility measures

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  • He, Yuqing

Abstract

The paper explores utility measures by combining experiments with mathematical derivations in psychophysics paradigm. The analysis on ultimatum game experiment reveals an evidence for utility threshold and thus supports Bernoulli's utility logarithmic law. Both experimental results and theoretical derivations show that the logarithmic law is suitable for the description of commodity choice and the power law for risk choice. The further mathematical demonstration indicates the logarithmic law for utility scaling to be a Klein-Rubin utility function, a utility function well defined in microeconomics. Based on this, the experimental utility measure is connected with the econometric model Linear Expenditure System, and presents an experimental procedure for testing the utility maximization hypothesis, which will remove a long unsettled perplexity in a fundamental stone of economics since Gossen proposed it in 1854.

Suggested Citation

  • He, Yuqing, 2011. "Psychophysical interpretation for utility measures," Economics Discussion Papers 2011-50, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201150
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    Cited by:

    1. He, Yuqing, 2012. "Experimental test of utility maximization," Economics Discussion Papers 2012-32, Kiel Institute for the World Economy (IfW Kiel).
    2. Zimny, Jacek & Michalak, Piotr & Szczotka, Krzysztof, 2015. "Polish heat pump market between 2000 and 2013: European background, current state and development prospects," Renewable and Sustainable Energy Reviews, Elsevier, vol. 48(C), pages 791-812.

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    More about this item

    Keywords

    Psychophysics; ultimatum game; utility function; logarithmic law; power law;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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