Paper #798

Title:

Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility

Authors:

Han Bleichrodt, José María Abellán-Perpiñan, JoséLuis Pinto and Ildefonso Méndez-Martínez

Date:

January 2005

Abstract:

This paper explores biases in the elicitation of utilities under risk and the contribution that generalizations of expected utility can make to the resolution of these biases. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studies, prospect theory was most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect(riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation why we found no improvement of prospect theory over expected utility in risk-risk methods may be that there was less overweighting of small probabilities in our study than has commonly been observed.

Keywords:

Utility Measurement, Nonexpected Utility, Prospect Theory, Health., Leex

JEL codes:

D81, I10

Area of Research:

Behavioral and Experimental Economics / Labour, Public, Development and Health Economics

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