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

James Andreoni and William T. Harbaugh ()
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William T. Harbaugh: University of Oregon

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)
Date: 2010-09-01, Revised 2010-04-03
New Economics Papers: this item is included in nep-evo, nep-exp and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2010-14

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