Publication: Resolving inconsistencies in utility measurement under risk: test of generalizations of expected utilities
Authors
Bleichrodt, Han ; Abellán Perpiñán, José María ; Pinto Prades, José Luis ; Méndez Martínez, Ildefonso
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Publisher
Institute for Operations Research and Management Sciences
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DOI
https://doi.org/10.1287/mnsc.1060.0647
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info:eu-repo/semantics/article
Description
© 2007 INFORMS. This document is the Published version of a Published Work that appeared in final form in Management Science. To access the final edited and published work see https://doi.org/10.1287/mnsc.1060.0647
Abstract
This paper explores inconsistencies that occur in utility measurement under risk when expected utility theory is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studied, prospect theory was the 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 for the latter observation may be that there was less distortion in probability weighting in the interval [0.10, 0.20] than has commonly been observed.
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Citation
Management Science, 2007, Vol. 53, N. 3, pp. 469-482
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