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Random expected utility and certainty equivalents: mimicry of probability weighting functions

Nathaniel T. Wilcox ()
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Nathaniel T. Wilcox: Chapman University

Journal of the Economic Science Association, 2017, vol. 3, issue 2, 161-173

Abstract: Abstract For simple prospects routinely used for certainty equivalent elicitation, random expected utility preferences imply a conditional expectation function that can mimic deterministic rank-dependent preferences. That is, a subject with random expected utility preferences can have expected certainty equivalents exactly like those predicted by rank-dependent probability weighting functions of the inverse-s shape discussed by Quiggin (J Econ Behav Organ 3:323–343, 1982) and advocated by Tversky and Kahneman (J Risk Uncertainty 5:297–323, 1992), Prelec (Econometrica 66:497–527, 1998) and other scholars. Certainty equivalents may not nonparametrically identify preferences: Their conditional expectation (and critically, their interpretation) depends on assumptions concerning the source of their variability.

Keywords: Certainty equivalence; Identification; Preference estimation; Preference measurement; Random preference; Choice under risk and uncertainty (search for similar items in EconPapers)
JEL-codes: C81 C91 D81 (search for similar items in EconPapers)
Date: 2017
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