Random expected utility and certainty equivalents: mimicry of probability weighting functions
Nathaniel Wilcox ()
Journal of the Economic Science Association, 2017, vol. 3, issue 2, No 6, 173 pages
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)
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Working Paper: Random Expected Utility and Certainty Equivalents: Mimicry of Probability Weighting Functions (2017)
Working Paper: Random Expected Utility and Certainty Equivalents: Mimicry of Probability Weighting Functions (2016)
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