Working Paper: NBER ID: w17342
Authors: James Andreoni; Charles Sprenger
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.
Keywords: No keywords provided
JEL Codes: D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected utility performance (D81) | failure near certainty (D81) |
| probability (p) (C46) | uncertainty equivalent (q) (D81) |
| probability (p) approaching 1 (C25) | breakdown of expected utility predictions (D81) |
| violations of stochastic dominance (D81) | preference for certainty (D81) |
| extreme experimental risk aversion and probability weighting (D81) | artifacts of preference for certainty (D81) |
| disappointment aversion and UV preferences (D11) | better explanation of observed data (C29) |