An Experimental Comparison of Risky and Diskless Choice – Limitations of Prospect Theory and Expected Utility Theory

37 Pages Posted: 2 Mar 2016

See all articles by Hui-Kuan Chung

Hui-Kuan Chung

New York University (NYU) - Department of Psychology

Paul Glimcher

New York University (NYU) - Center for Neuroeconomics

Agnieszka Tymula

The University of Sydney - School of Economics; New York University (NYU) - Center for Neuroeconomics

Date Written: February 29, 2016

Abstract

Prospect theory, widely used descriptively for decisions under both risk and certainty, presumes concave utility over “gains” and convex utility over “losses”; a pattern widely seen in lottery tasks. Although such gain-loss asymmetry is also widely used to model riskless choices, limited empirical evidence supports this use. In incentive-compatible experiments we find that in riskless choice gain-loss asymmetries are not observed as predicted by prospect theory even while in the same participants gain-loss asymmetries are observed under risk. Our results imply that utility functions under conditions of certainty can be more closely approximated using neoclassical rather than prospect theoretic preferences.

Keywords: indifference curve; riskless choice; reflection effect; reference point; losses

JEL Classification: D81

Suggested Citation

Chung, Hui-Kuan and Glimcher, Paul and Tymula, Agnieszka, An Experimental Comparison of Risky and Diskless Choice – Limitations of Prospect Theory and Expected Utility Theory (February 29, 2016). Available at SSRN: https://ssrn.com/abstract=2740003 or http://dx.doi.org/10.2139/ssrn.2740003

Hui-Kuan Chung

New York University (NYU) - Department of Psychology ( email )

New York, NY 10003
United States

Paul Glimcher

New York University (NYU) - Center for Neuroeconomics ( email )

4 Washington Place, Room 809
New York, NY 10003
United States

Agnieszka Tymula (Contact Author)

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

New York University (NYU) - Center for Neuroeconomics ( email )

4 Washington Place, Room 809
New York, NY 10003
United States

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