The two faces of independence: betweenness and homotheticity

Daniel Burghart

Theory and Decision, 2020, vol. 88, issue 4, No 6, 567-593

Abstract: Abstract This paper shows that expected utility belongs to the intersection of models satisfying betweenness and a homotheticity condition for risky choice. Betweenness models can accommodate variable risk attitudes, originally highlighted by the Allais paradox, by restricting indifference curves to be linear while allowing non-parallelism. Homotheticity, in contrast, restricts indifference curves to be parallel while permitting non-linearities, such as those highlighted by inverse-S probability weighting. Data from an experiment indicate that approximately 2/3s of participants satisfied homotheticity. Of this group, about half satisfied the expected utility hypothesis. The other half violated expected utility and therefore betweenness. These results indicate that homothetic preferences, and in particular those violating betweenness, can be empirically relevant for decision making under risk.

Keywords: Risk preferences; Expected utility; Independence axiom; Betweenness; Homotheticity; Revealed preferences (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11238-019-09735-2

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