On the Origin of Utility, Weighting, and Discounting Functions: How They Get Their Shapes and How to Change Their Shapes

Neil Stewart (), Stian Reimers () and Adam J. L. Harris ()
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Neil Stewart: Department of Psychology, University of Warwick, Coventry CV4 7AL, United Kingdom
Stian Reimers: Department of Psychology, City University London, London EC1V 0HB, United Kingdom
Adam J. L. Harris: Department of Cognitive, Perceptual and Brain Sciences, University College London, London WC1H 0AP, United Kingdom

Management Science, 2015, vol. 61, issue 3, 687-705

Abstract: We present a theoretical account of the origin of the shapes of utility, probability weighting, and temporal discounting functions. In an experimental test of the theory, we systematically change the shape of revealed utility, weighting, and discounting functions by manipulating the distribution of monies, probabilities, and delays in the choices used to elicit them. The data demonstrate that there is no stable mapping between attribute values and their subjective equivalents. Expected and discounted utility theories, and also their descendants such as prospect theory and hyperbolic discounting theory, simply assert stable mappings to describe choice data and offer no account of the instability we find. We explain where the shape of the mapping comes from and, in describing the mechanism by which people choose, explain why the shape depends on the distribution of gains, losses, risks, and delays in the environment.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1853 . This paper was accepted by Yuval Rottenstreich, judgment and decision making .

Keywords: utility; probability weighting; subjective probability; temporal discounting; delay discounting; stable preferences; decision by sampling; range frequency theory; risky choice; decision under risk; intertemporal choice; decision under delay (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:3:p:687-705

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