An Empirical Assessment of Alternative Models of Risky Decision Making

26 Pages Posted: 6 Dec 2010

See all articles by Joanna R. Baker

Joanna R. Baker

affiliation not provided to SSRN

Pamela K. Lattimore

affiliation not provided to SSRN

Ann Dryden Witte

Wellesley College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 1988

Abstract

In this paper, we assess the degree to which four of the most commonly used models of risky decision making can explain the choices individuals make when faced with risky prospects. To make this assessment, we use experimental evidence for two random samples of young adults. Using a robust, nonlinear least squares procedure, we estimate a model that is general enough to approximate Kahnenman and Tversky's prospect theory and that for certain parametric values will yield the expected utility model, a subjective expected utility model and a probability-transform model. We find that the four models considered explain the decision-making behavior of the majority of our subjects. Surprisingly, we find that the choice behavior of the largest number of subjects is consistent with a probability-transform model. Such models have only been developed recently and have not been used in applied settings. We find least support for the expected utility model -- the most widely used model of risky decision making.

Suggested Citation

Baker, Joanna R. and Lattimore, Pamela K. and Dryden Witte, Ann, An Empirical Assessment of Alternative Models of Risky Decision Making (September 1988). NBER Working Paper No. w2717, Available at SSRN: https://ssrn.com/abstract=1720803

Joanna R. Baker (Contact Author)

affiliation not provided to SSRN

No Address Available

Pamela K. Lattimore

affiliation not provided to SSRN

No Address Available

Ann Dryden Witte

Wellesley College - Department of Economics ( email )

106 Central Street
Wellesley, MA 02181
United States
781-283-2163 (Phone)
781-283-2177 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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