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Equal Tails: A Simple Method to Elicit Utility Under Violations of Expected Utility

Manel Baucells () and Antonio Villasís ()
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Manel Baucells: Darden School of Business, University of Virginia, Charlottesville, Virginia 22903
Antonio Villasís: IDE Escuela de Dirección de Empresas, Quito, Ecuador

Decision Analysis, 2015, vol. 12, issue 4, pages 190-204

Abstract: Classical methods to elicit utility are biased because most individuals do not treat probabilities linearly. We propose a simple modification of the classical methods that equates, for all prospects being compared, the range of outcomes. We argue that the modification should work in theory, and test the modification experimentally. Our first experiment confirms that the modified certainty equivalent method reduces the curvature of the S-shaped value function. The second experiment is a novel design that compares the trade-off method with the three classical methods in their original and modified forms. Our equal-tails modification of both the certainty equivalent and the lottery equivalent method produces results consistent with the trade-off method. The lottery equivalent modification is particularly useful to elicit utility points when outcomes are nonquantifiable.

Keywords: elicitation of the utility function; nonlinear probability weighting (search for similar items in EconPapers)
Date: 2015
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