scholarly journals Probability weighting explains Independence Axiom violations of Expected Utility Theory in monkeys

2021 ◽  
Author(s):  
Simone Ferrari-Toniolo ◽  
Leo Chi U Seak ◽  
Wolfram Schultz
Keyword(s):  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Risky Choice ◽  
Independence Axiom ◽  
Probability Weighting ◽  
Preference Reversals ◽  
Risky Decision ◽  
Linear Discriminant ◽  
Better Than

Expected Utility Theory (EUT) provides axioms for maximizing utility in risky choice. The independence axiom (IA) is its most demanding axiom: preferences between two options should not change when altering both options equally by mixing them with a common gamble. We tested common consequence (CC) and common ratio (CR) violations of the IA in thousands of stochastic choice over several months using a large variety of binary option sets. Three monkeys showed few outright Preference Reversals (8%) but substantial graded Preference Changes (46%) between the initial preferred gamble and the corresponding altered gamble. Linear Discriminant Analysis (LDA) indicated that gamble probabilities predicted most Preference Changes in CC (72%) and CR (87%) tests. The Akaike Information Criterion indicated that probability weighting within Cumulative Prospect Theory (CPT) explained choices better than models using Expected Value (EV) or EUT. Fitting by utility and probability weighting functions of CPT resulted in nonlinear and non-parallel indifference curves (IC) in the Marschak-Machina triangle and suggested IA non-compliance of models using EV or EUT. Indeed, CPT models predicted Preference Changes better than EV and EUT models. Indifference points in out-of-sample tests were closer to CPT-estimated ICs than EV and EUT ICs. Finally, while the few outright Preference Reversals may reflect the long experience of our monkeys, their more graded Preference Changes corresponded to those reported for humans. In benefitting from the wide testing possibilities in monkeys, our stringent axiomatic tests contribute critical information about risky decision-making and serves as basis for investigating neuronal decision mechanisms.

Contrasting Rational and Psychological Analyses of Political Choice

1988 ◽  
Vol 82 (3) ◽  
pp. 719-736 ◽  
Author(s):  
George A. Quattrone ◽  
Amos Tversky
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Reference Point ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Risky Choice ◽  
Political Candidates ◽  
Risk Seeking ◽  
Psychological Analysis

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.

scholarly journals Violations of coalescing in parametric utility measurement

2020 ◽  
Vol 89 (4) ◽  
pp. 471-501
Author(s):  
Andreas Glöckner ◽  
Baiba Renerte ◽  
Ulrich Schmidt
Keyword(s):  
Expected Utility ◽  
Choice Experiment ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Empirical Literature ◽  
Probability Weighting ◽  
Weighting Functions ◽  
Majority Consensus ◽  
Split Form ◽  
Analyze Data

Abstract The majority consensus in the empirical literature is that probability weighting functions are typically inverse-S shaped, that is, people tend to overweight small and underweight large probabilities. A separate stream of literature has reported event-splitting effects (also called violations of coalescing) and shown that they can explain violations of expected utility. This leads to the questions whether (1) the observed shape of weighting functions is a mere consequence of the coalesced presentation and, more generally, whether (2) preference elicitation should rely on presenting lotteries in a canonical split form instead of the commonly used coalesced form. We analyze data from a binary choice experiment where all lottery pairs are presented in both split and coalesced forms. Our results show that the presentation in a split form leads to a better fit of expected utility theory and to probability weighting functions that are closer to linear. We thus provide some evidence that the extent of probability weighting is not an ingrained feature, but rather a result of processing difficulties.

scholarly journals Comment on “Risk Preferences Are Not Time Preferences”: Balancing on a Budget Line

2015 ◽  
Vol 105 (7) ◽  
pp. 2261-2271 ◽  
Author(s):  
Thomas Epper ◽  
Helga Fehr-Duda
Keyword(s):  
Utility Theory ◽  
Expected Utility Theory ◽  
Decision Makers ◽  
Time Preferences ◽  
Probability Weighting ◽  
Portfolio Risk ◽  
Risky Decision ◽  
Recent Experimental Study ◽  
Rank Dependent Utility ◽  
Dependent Probability

In a recent experimental study of intertemporal risky decision making, Andreoni and Sprenger (2012) find that subjects exhibit a preference for intertemporal diversification, which is inconsistent with discounted expected utility theory. It was claimed that their results are also at odds with models involving probability weighting, such as rank-dependent utility and cumulative prospect theory. Here we demonstrate, however, that rank-dependent probability weighting explains intertemporal diversification if decision makers care about portfolio risk. Moreover, we provide a unified account of all of Andreoni and Sprenger's key findings. (JEL C91, D81, D91)

scholarly journals Weak* Axiom of Independence and the Non-Expected Utility Theory

2012 ◽  
Vol 4 (1) ◽  
pp. 67-75
Author(s):  
Tapan Biswas
Keyword(s):  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Point Of View ◽  
Independence Axiom ◽  
Weak Version ◽  
Von Neumann ◽  
The Mean ◽  
Mean Variance ◽  
Weak Axiom

The axiomatic foundation of the expected utility theory (which states that given a set of uncertain prospects individuals pick up the prospect which yields the highest expected utility) was first laid down by Von Neumann and Morgenstern (1947). This axiom has come under severe criticisms in recent years. A large number of experiments have shown that in making decisions involving uncertain prospects people frequently violate the independence axiom. In this paper we shall consider the problem of choice under uncertainty from a wider point of view and we shall examine the nature of the restriction imposed by the axiom of independence. We shall use the mean-variance utility function to prove our point. Then we shall consider a weak version of the independence axiom namely the weak* axiom of independence. This is the point of departure from the expected utility theory to the realm of the non-expected utility theory. The weak* axiom allows aversion to pure uncertainty and, in the context of the mean-variance utility theory, it is compatible with utility being an increasing function of expected returns at all levels.

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