Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility

Bleichrodt, Han; Abellán Perpiñán, José María; Pinto, José Luis; Méndez-Martínez, Ildefonso

Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility

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Bleichrodt, H, Abellán Perpiñán, J, Pinto, J, Méndez-Martínez, I. Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility. 2005. handle: http://hdl.handle.net/10230/1222

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Abstract

This paper explores biases in the elicitation of utilities under risk and the contribution that generalizations of expected utility can make to the resolution of these biases. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studies, prospect theory was most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect(riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation why we found no improvement of prospect theory over expected utility in risk-risk methods may be that there was less overweighting of small probabilities in our study than has commonly been observed.