Uncertainty Equivalents: Testing the Limits of the Independence Axiom

41 Pages Posted: 29 Aug 2011 Last revised: 20 Nov 2024

See all articles by James Andreoni

James Andreoni

University of California, San Diego (UCSD)

Charles Sprenger

University of California, San Diego (UCSD)

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

Andreoni, James and Sprenger, Charles, Uncertainty Equivalents: Testing the Limits of the Independence Axiom (August 2011). NBER Working Paper No. w17342, Available at SSRN: https://ssrn.com/abstract=1918672

James Andreoni (Contact Author)

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

HOME PAGE: http://econ.ucsd.edu/~jandreon/

Charles Sprenger

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

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