Unexpected Utility: Experimental Tests of Five Key Questions about Preferences over Risk

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Title: Unexpected Utility: Experimental Tests of Five Key Questions about Preferences over Risk
Author: Andreoni, James; Harbaugh, William
Abstract: Experimental work on preferences over risk has typically considered choices over a small number of discrete options, some of which involve no risk. Such experiments often demonstrate contradictions of standard expected utility theory. We reconsider this literature with a new preference elicitation device that allows a continuous choice space over only risky options. Our analysis assumes only that preferences depend on the probability p and prize x; U = u(p; x): We then allow subjects to choose p and x continuously on a linear budget constraint, r1p + r2x = m, so that all prospects with a nonzero expected value are risky. We test five of the most importantly debated questions about risk preferences: rationality, prospect theory asymmetry, the independence axiom, probability weighting, and constant relative risk aversion. Overall, we find that the expected utility model does unexpectedly well.
Description: 28 p.
URI: http://hdl.handle.net/1794/11000
Date: 2009-12


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