Is There a Plausible Theory for Decision Under Risk? A Dual Calibration Critique

42 Pages Posted: 27 Feb 2011

See all articles by James C. Cox

James C. Cox

Georgia State University - Department of Economics

Vjollca Sadiraj

Georgia State University - Department of Economics

Utteeyo Dasgupta

Fordham University; IZA; Global Labor Organization (GLO)

Bodo Vogt

Bielefeld University - Center for Mathematical Economics

Date Written: June 1, 2010

Abstract

Theories of decision under risk that assume decreasing marginal utility of money have been critiqued with concavity calibration arguments. Since that critique uses varying payoffs and fixed probabilities, it cannot have implications for calibration of nonlinear probability transformation, which is another way to model risk aversion. The concavity calibration critique also has no implication for theories with variable reference points. This paper introduces a new type of (varying-probabilities, fixed-payoffs) calibration that applies to nonlinear transformation of probabilities. It also applies to theories with constant or variable reference points. The two types of calibrations yield dual paradoxes: a pattern of risk aversion that conforms to the (resp. dual) independence axiom implies implausible risk aversion for theories with functionals that are linear in payoffs (resp. probabilities). Functionals that are nonlinear in both payoffs and probabilities are subject to both types of calibration critique. The dual calibrations make clear why plausibility problems with theories of decision under risk may be fundamental. They are fundamental if their empirical relevance can be demonstrated. This paper reports seven experiments that provide data on the empirical relevance of the dual calibration critique of decision theory.

JEL Classification: C90, D81

Suggested Citation

Cox, James C. and Sadiraj, Vjollca and Dasgupta, Utteeyo and Vogt, Bodo, Is There a Plausible Theory for Decision Under Risk? A Dual Calibration Critique (June 1, 2010). Andrew Young School of Policy Studies Research Paper Series No. 11-15, Available at SSRN: https://ssrn.com/abstract=1769974 or http://dx.doi.org/10.2139/ssrn.1769974

James C. Cox (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
404-651-8888 (Phone)
404-651-0425 (Fax)

Vjollca Sadiraj

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Utteeyo Dasgupta

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

HOME PAGE: http://https://sites.google.com/view/utteeyodasgupta/home

IZA ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Global Labor Organization (GLO) ( email )

Collogne
Germany

Bodo Vogt

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

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