BETTING MARKET: Rank Dependent Expected Utility

2013 ◽  
Vol 1 (2) ◽  
pp. 147-163
Author(s):  
Loreto Llorente
Keyword(s):  
Decision Theory ◽  
Expected Utility ◽  
Utility Maximization ◽  
Betting Market ◽  
Expected Utility Maximization ◽  
Classical Decision ◽  
Rank Dependent Expected Utility ◽  
The Way

In Pelota matches, games with two mutually exclusive and exhaustive outcomes, bets on the winner are made through a middleman who receives 16% of the finally paid amount. The classical decision theory of expected utility maximization can not explain this market assuming bettors are identical. Llorente and Aizpurua (2007) explain the existence of bets in the market under Quiggin’s rank dependent expected utility (RDEU) model. They find that bettors have to be optimistic in order to explain the existence of a bet. Analyzing the way odds are fixed in the market Llorente (2006) finds that assuming equal return on bets there are inefficiencies in the market. In this paper we show that, given an assumption that bettors are rank dependent expected utility maximizers, these inefficiencies tend to disappear.

scholarly journals Discriminating Between Models of Ambiguity Attitude: a Qualitative Test

2019 ◽  
Vol 18 (2) ◽  
pp. 708-749 ◽  
Author(s):  
Robin Cubitt ◽  
Gijs van de Kuilen ◽  
Sujoy Mukerji
Keyword(s):  
Economic Theory ◽  
Expected Utility ◽  
Maxmin Expected Utility ◽  
Smooth Ambiguity Model ◽  
New Models ◽  
Qualitative Test ◽  
Behavioral Issue ◽  
Ambiguity Attitude

AbstractDuring recent decades, many new models have emerged in pure and applied economic theory according to which agents’ choices may be sensitive to ambiguity in the uncertainty that faces them. The exchange between Epstein (2010) and Klibanoff et al. (2012) identified a notable behavioral issue that distinguishes sharply between two classes of models of ambiguity sensitivity that are importantly different. The two classes are exemplified by the α-maxmin expected utility (MEU) model and the smooth ambiguity model, respectively; and the issue is whether or not a desire to hedge independently resolving ambiguities contributes to an ambiguity-averse agent's preference for a randomized act. Building on this insight, we implement an experiment whose design provides a qualitative test that discriminates between the two classes of models. Among subjects identified as ambiguity sensitive, we find greater support for the class exemplified by the smooth ambiguity model; the relative support is stronger among subjects identified as ambiguity averse. This finding has implications for applications that rely on specific models of ambiguity preference.

A Comparison of Probabilistic Prize Promotion Schemes

2012 ◽  
Vol 40 (7) ◽  
pp. 1183-1194 ◽  
Author(s):  
Rong Chen ◽  
Jinsong Huang ◽  
Song Su ◽  
Feng He
Keyword(s):  
Optimal Design ◽  
Expected Utility ◽  
Cell Phone ◽  
Utility Model ◽  
Winning Probability ◽  
Behavioral Theories ◽  
Expected Utility Model ◽  
Rank Dependent Expected Utility

Based on the rank-dependent expected utility model (Quiggin, 1991), hypotheses are formed in this study regarding optimal prize promotion structure with reference to associated probabilistic aspects. Referencing both modeling works and related behavioral theories, we compared several design schemes. Using purchase scenarios of a low-value product (bread) and a high-value product (cell phone) we determined the optimal design among promotion schemes that differ by winning probability, prize amount, and number of prize value levels. We found that a promotion offering a combination of high-value prizes plus some low-value prizes was invariably preferred over a promotion offering only high- or low-value prizes. We also explored whether these high- or low-value prizes should be in a series of ascending value or prizes at each value level should be of the same value and whether or not some moderately valuable prizes should also be included.

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