Risk Aversion with State-Dependent Preferences in the Rank-Dependent Expected Utility Theory

1996 ◽  
Vol 21 (2) ◽  
pp. 159-177 ◽  
Author(s):  
W. Henry Chiu
1988 ◽  
Vol 82 (3) ◽  
pp. 719-736 ◽  
Author(s):  
George A. Quattrone ◽  
Amos Tversky

We contrast the rational theory of choice in the form of expected utility theory with descriptive psychological analysis in the form of prospect theory, using problems involving the choice between political candidates and public referendum issues. The results showed that the assumptions underlying the classical theory of risky choice are systematically violated in the manner predicted by prospect theory. In particular, our respondents exhibited risk aversion in the domain of gains, risk seeking in the domain of losses, and a greater sensitivity to losses than to gains. This is consistent with the advantage of the incumbent under normal conditions and the potential advantage of the challenger in bad times. The results further show how a shift in the reference point could lead to reversals of preferences in the evaluation of political and economic options, contrary to the assumption of invariance. Finally, we contrast the normative and descriptive analyses of uncertainty in choice and address the rationality of voting.


2008 ◽  
Vol 98 (1) ◽  
pp. 38-71 ◽  
Author(s):  
Thierry Post ◽  
Martijn J van den Assem ◽  
Guido Baltussen ◽  
Richard H Thaler

We examine the risky choices of contestants in the popular TV game show “Deal or No Deal” and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well defined, and when large real monetary amounts are at stake. (JEL D81)


2020 ◽  
Vol 12 (8) ◽  
pp. 3367 ◽  
Author(s):  
Kairong Hong ◽  
Yucheng Zou ◽  
Yanwei Zhang ◽  
Kaifeng Duan

During land expropriation, it is difficult to form a real antagonistic relationship between farmers and the local Government due to disparities, which means the confrontations between them are difficult to administer. The confrontation between both parties could lead to the distortion of the farmers’ resisting logic, who are supposed to be in a vulnerable position. Hence, the farmers are not necessarily in a weak position; sometimes, they even have advantages compared with the local governments. Through the combination of Quiggin’s rank-based expected utility theory and evolutionary game theory, this paper constructs a conflict-induced game mechanism Rank-Dependent Expected Utility Theory (RDEU) evolutionary game model and discusses the evolution law of strategic behavior of land-expropriated farmers and local governments under the influence of emotion. The software simulation results show that when the farmers at the weak side think that the probability of the government adopting the strong strategy is higher than a certain cut-off point, the farmers will use the weapon of the weak to release the signal that endangers the order and force the government to adopt a compromise strategy by utilizing authoritative preference for stability. Through the interaction of heterogeneous beliefs between farmers and the government, the game of land expropriation will form an evolutionary stable equilibrium.


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