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Unexpected Utility: Experimental Tests of Five Key Questions about Preferences over Risk

James Andreoni () and William Harbaugh ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: Experimental work on preferences over risk has typically considered choices over a small number of discrete options, some of which involve no risk. Such experiments often demonstrate contradictions of standard expected utility theory. We reconsider this literature with a new preference elicitation device that allows a continuous choice space over only risky options. Our analysis assumes only that preferences depend on the probability p and prize x; U = u(p; x): We then allow subjects to choose p and x continuously on a linear budget constraint, r1p + r2x = m, so that all prospects with a nonzero expected value are risky. We test five of the most importantly debated questions about risk preferences: rationality, prospect theory asymmetry, the independence axiom, probability weighting, and constant relative risk aversion. Overall, we find that the expected utility model does unexpectedly well.

Keywords: expected; utility (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-evo, nep-exp and nep-upt
Date: 2010-09-01, Revised 2010-04-03
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