Resolving Inconsistencies in Utility Measurement under Risk: Tests of Generalizations of Expected Utility

Han Bleichrodt (), Jose María Abellán Perpiñán (), Jose-Luis Pinto-Prades and Ildefonso Mendez Martinez
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Han Bleichrodt: Erasmus University, Rotterdam
Jose María Abellán Perpiñán: University of Murcia
Authors registered in the RePEc Author Service: Jose-Maria Abellan-Perpiñan ()

No 06.19, Working Papers from Universidad Pablo de Olavide, Departamento de Economía

Abstract: This paper explores inconsistencies that occur in utility measurement under risk when expected utility is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studied, prospect theory was the most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect (riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation for the latter observation may be that there was less distortion in probability weighting in the interval [0.10, 0.20] than has commonly been observed.

Keywords: Utility Measurement; Nonexpected Utility; Prospect Theory; Health. (search for similar items in EconPapers)
JEL-codes: I10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2006-07
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http://www.upo.es/serv/bib/wps/econ0619.pdf First version, 2006 (application/pdf)

Related works:
Working Paper: Resolving Inconsistencies in Utility Measurement under Risk: Tests of Generalizations of Expected Utility (2005)
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