Nonlinear Preferences and Two-Stage Lotteries: Theories and Evidence

Michele Bernasconi ()

Economic Journal, 1994, vol. 104, issue 422, 54-70

Abstract: Nonlinear preferences models are theories for choice under risk which have weakened in one way or another the Independence Axiom of Expected Utility. In this paper we present an experiment designed to discriminate between some basic ideas in this literature. We tested the Betweenness axiom, a weaker form of Independence, against an alternative which predicts that indifference curves in the probabilities simplex are convex along the lower edge and concave along the hypotenuse. We also checked whether preferences among single-stage lotteries, as those revealed by our test of Betweenness, should be extended to preferences among two-stage lottery via the classical Reduction of Compound Lottery axiom or via the Certainty Equivalent Mechanism. Copyright 1994 by Royal Economic Society.

Date: 1994
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