Uncertainty Equivalents: Testing the Limits of the Independence Axiom
41 Pages Posted: 29 Aug 2011 Last revised: 20 Nov 2024
Date Written: August 2011
Abstract
There is convincing experimental evidence that Expected Utility fails, but when does it fail, how severely, and for what fraction of subjects? We explore these questions using a novel measure we call the uncertainty equivalent. We find Expected Utility performs well away from certainty, but fails near certainty for about 40% of subjects. Comparing non-Expected Utility theories, we strongly reject Prospect Theory probability weighting, we support disappointment aversion if amended to allow violations of stochastic dominance, but find the u-v model of a direct preference for certainty the most parsimonious approach.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Vincent P. Crawford and Juanjuan Meng
-
Reference Points and Effort Provision
By Johannes Abeler, Armin Falk, ...
-
Reference Points and Effort Provision
By Johannes Abeler, Armin Falk, ...
-
Reference Points and Effort Provision
By Johannes Abeler, Armin Falk, ...
-
A Structural Analysis of Disappointment Aversion in a Real Effort Competition
By David Gill and Victoria L. Prowse
-
A Structural Analysis of Disappointment Aversion in a Real Effort Competition
By David Gill and Victoria L. Prowse
-
Fairness and Desert in Tournaments
By David Gill and Rebecca Stone
-
Binary Payment Schemes: Moral Hazard and Loss Aversion
By Fabian Herweg, Daniel Müller, ...
-
Is the Endowment Effect a Reference Effect?
By Ori Heffetz and John A. List