Decision Making with Risky, Rival Outcomes: Theory and Evidence

David Johnson () and Matthew Webb

No 16-12, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: Little is known about how individuals make decisions when they must choose several options from a set of options when the outcomes are risky and the payoffs are rival. When researchers model these decisions, they assume people maximize their expected utility. We design an experiment in which subjects face either rival or independent payoffs. While theory predicts different behavior, subjects behave nearly identically under these payoff schemes. This suggests individuals are not maximizing expected utility. Additional treatments demonstrate that this behavior is likely driven by a heuristic used to simplify a complex math problem, rather than a preference for lotteries with the highest independent expected utilities. Our results suggest that using expected utility as peoples' objective function in these types of environments will lead to biased predictions.

Keywords: decision making; risk; rival; online experiment (search for similar items in EconPapers)
JEL-codes: C90 D01 D81 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2016-09-18
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-sog and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published: Carleton Economic Papers

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