Uncertainty Equivalents: Testing the Limits of the Independence Axiom

James Andreoni and Charles Sprenger

No 17342, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: There is convincing experimental evidence that Expected Utility fails, but when does it fail, how severely, and for what fraction of subjects? We explore these questions using a novel measure we call the uncertainty equivalent. We find Expected Utility performs well away from certainty, but fails near certainty for about 40% of subjects. Comparing non-Expected Utility theories, we strongly reject Prospect Theory probability weighting, we support disappointment aversion if amended to allow violations of stochastic dominance, but find the u-v model of a direct preference for certainty the most parsimonious approach.

JEL-codes: D81 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-evo, nep-exp, nep-gth, nep-mic and nep-upt
Note: PE
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Citations: View citations in EconPapers (29)

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