An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory
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AbstractProspect theory, 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 discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains.
CitationChung, Hui-Kuan, Paul Glimcher, and Agnieszka Tymula. 2019. "An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory." American Economic Journal: Microeconomics, 11 (3): 34-67. DOI: 10.1257/mic.20170112
- C91 Design of Experiments: Laboratory, Individual
- D12 Consumer Economics: Empirical Analysis
- D81 Criteria for Decision-Making under Risk and Uncertainty
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