Comonotonic Independence: The Critical Test between Classical and Rank-Dependent Utility Theories

37 Pages Posted: 8 Jan 2009

See all articles by Peter P. Wakker

Peter P. Wakker

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management

Elke U. Weber

Princeton University - Department of Psychology

Date Written: December 1994

Abstract

This article compares classical expected utility (EU) with the more general rank-dependent utility (RDU) models. The difference between the independence condition for preferences of EU and its comonotonic generalization in RDU provides the exact demarcation between EU and rank-dependent models. Other axiomatic differences are not essential. An experimental design is described that tests this difference between independence and comonotonic independence in its most basic form and is robust against violations of other assumptions that may confound the results, in particular the reduction principle and transitivity. It is well known that in the classical counterexamples to EU, comonotonic independence performs better than full-force independence. For our more general choice pairs, however, we find that comonotonic independence does not perform better. This is contrary to our prior expectation and suggests that rank-dependent models, in full generality, do not provide a descriptive improvement over EU. For rank-dependent models to have a future, submodels and choice situations need to be identified for which rank-dependence does contribute descriptively.

Keywords: rank-dependence, nonexpected utility, comonotonicity, prospect theory, independence

Suggested Citation

Wakker, Peter P. and Erev, Ido and Weber, Elke U., Comonotonic Independence: The Critical Test between Classical and Rank-Dependent Utility Theories (December 1994). Journal of Risk and Uncertainty, Vol. 9, No. 3, 1994. Available at SSRN: https://ssrn.com/abstract=1323453

Peter P. Wakker

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel

Elke U. Weber (Contact Author)

Princeton University - Department of Psychology

Green Hall
Princeton, NJ 08540
United States

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