"Lottery Equivalents": Reduction of the Certainty Effect Problem in Utility Assessment

Mark McCord and Richard de Neufville
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Mark McCord: Ohio State University, Columbus, Ohio 43210
Richard de Neufville: Technology and Policy Program, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139

Management Science, 1986, vol. 32, issue 1, 56-60

Abstract: This note describes a simple procedure for assessing utility functions which avoids many difficulties of the standard techniques. The conventional methods suffer from at least three drawbacks; they (1) generate utility functions that depend on the probability levels used; (2) chain responses from one question to the next, so that any bias is propagated and even magnified; and (3) change ranges and reference points constantly, introducing range effects and other distortions. Noting the evidence linking the dependence of utility functions on the "certainty effect," our method: (1) compares lotteries with other lotteries rather than certain amounts; (2) does not "chain" responses; and (3) consistently uses "elementary lotteries" which control for range and reference points. Experimental work supports the proposed procedure.

Keywords: utility; measurement; certainty effect; certainty equivalent; lottery equivalent (search for similar items in EconPapers)
Date: 1986
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