scholarly journals On the futility of estimating utility functions: Why the parameters we measure are wrong, and why they do not generalize

2019 ◽  
Author(s):  
Neil Stewart ◽  
Emina Canic ◽  
Timothy L Mullett
Keyword(s):  
Parameter Estimation ◽  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Utility Functions ◽  
Parameter Estimates ◽  
Risky Choices ◽  
Long Time

We have known for a long time that people’s risky choices depart systematically from expected utility theory,and also from related models like prospect theory. But it is still common to use expected utility theory orprospect theory to estimate parameters like risk aversion from sets of risky choices. We have also known fora long time that when parameters are estimated, a systematic departure between the model and the datacauses biased parameter estimates. Here we show how the bias in parameter estimation interacts with the setof choices presented to participants. We find that estimates of risk aversion vary greatly between choice setseven though no real differences in risk aversion exist. We find parameters do not generalise at all betweenchoice sets, even when the sets are random draws from a master choice set.

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 Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show

2008 ◽  
Vol 98 (1) ◽  
pp. 38-71 ◽  
Author(s):  
Thierry Post ◽  
Martijn J van den Assem ◽  
Guido Baltussen ◽  
Richard H Thaler
Keyword(s):  
Decision Making ◽  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Path Dependence ◽  
Expected Utility Theory ◽  
Decision Making Under Risk ◽  
Game Show ◽  
Dependent Choice

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)

scholarly journals Cumulative Prospect Theory Version with Fuzzy Values of Outcome Estimates

Risks ◽  
2021 ◽  
Vol 9 (4) ◽  
pp. 72
Author(s):  
Oleg Uzhga-Rebrov ◽  
Peter Grabusts
Keyword(s):  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Cumulative Prospect Theory ◽  
Development History ◽  
Decisions Under Risk ◽  
History Of ◽  
Main Factors ◽  
Theoretical Foundations

Choosing solutions under risk and uncertainty requires the consideration of several factors. One of the main factors in choosing a solution is modeling the decision maker’s attitude to risk. The expected utility theory was the first approach that allowed to correctly model various nuances of the attitude to risk. Further research in this area has led to the emergence of even more effective approaches to solving this problem. Currently, the most developed theory of choice with respect to decisions under risk conditions is the cumulative prospect theory. This paper presents the development history of various extensions of the original expected utility theory, and the analysis of the main properties of the cumulative prospect theory. The main result of this work is a fuzzy version of the prospect theory, which allows handling fuzzy values of the decisions (prospects). The paper presents the theoretical foundations of the proposed version, an illustrative practical example, and conclusions based on the results obtained.

Housing Market Search Behavior and Expected Utility Theory: 1. Measuring Preferences for Housing

1982 ◽  
Vol 14 (5) ◽  
pp. 681-698 ◽  
Author(s):  
T R Smith ◽  
W A V Clark
Keyword(s):  
Los Angeles ◽  
Housing Market ◽  
Expected Utility ◽  
Utility Theory ◽  
House Price ◽  
Expected Utility Theory ◽  
Utility Functions ◽  
Future Search ◽  
Space Construction ◽  
Market Search

This is the first of two papers examining housing market search in a Los Angeles market. In this paper, we derive and analyze utility functions for housing for each individual in two groups of subjects. The utility functions are derived from an experimental setting, in which house price, floor space, construction quality, and neighborhood quality are varied. The functions are found to be essentially compatible with a linear model. They are used to predict the ratings of real houses and the ratings of the expected value of future search. These ratings are compared with actual ratings obtained from subjects during search. The results suggest that the actual or predicted ratings may be employed in a direct test of a simple expected utility theory of search, and further research along these lines appears justified.

scholarly journals Comparing utility functions between risky and riskless choice in rhesus monkeys

2021 ◽  
Author(s):  
Philipe M. Bujold ◽  
Simone Ferrari-Toniolo ◽  
Leo Chi U Seak ◽  
Wolfram Schultz
Keyword(s):  
Utility Function ◽  
Utility Theory ◽  
Utility Maximization ◽  
Choice Behavior ◽  
Expected Utility Theory ◽  
Utility Functions ◽  
Random Utility Maximization ◽  
Risky Choices ◽  
Neuronal Mechanisms ◽  
Subjective Value

AbstractDecisions can be risky or riskless, depending on the outcomes of the choice. Expected Utility Theory describes risky choices as a utility maximization process: we choose the option with the highest subjective value (utility), which we compute considering both the option’s value and its associated risk. According to the random utility maximization framework, riskless choices could also be based on a utility measure. Neuronal mechanisms of utility-based choice may thus be common to both risky and riskless choices. This assumption would require the existence of a utility function that accounts for both risky and riskless decisions. Here, we investigated whether the choice behavior of macaque monkeys in riskless and risky decisions could be described by a common underlying utility function. We found that the utility functions elicited in the two choice scenarios were different from each other, even after taking into account the contribution of subjective probability weighting. Our results suggest that distinct utility representations exist for riskless and risky choices, which could reflect distinct neuronal representations of the utility quantities, or distinct brain mechanisms for risky and riskless choices. The different utility functions should be taken into account in neuronal investigations of utility-based choice.

scholarly journals An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory

2019 ◽  
Vol 11 (3) ◽  
pp. 34-67 ◽  
Author(s):  
Hui-Kuan Chung ◽  
Paul Glimcher ◽  
Agnieszka Tymula
Keyword(s):  
Prospect Theory ◽  
Empirical Evidence ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Experimental Comparison ◽  
Reference Dependence ◽  
Empirical Results ◽  
Incentive Compatible ◽  
Gain Loss

Prospect theory, used descriptively for decisions under both risk and certainty, presumes concave utility over gains and convex utility over losses; a pattern widely seen in lottery tasks. Although such discontinuous gain-loss reference-dependence is also used to model riskless choices, only limited empirical evidence supports this use. In incentive-compatible experiments, we find that gain-loss reflection effects are not observed under riskless choice as predicted by prospect theory, even while in the same subjects gain-loss reflection effects are observed under risk. Our empirical results challenge the application of choice models across both risky and riskless domains. (JEL C91, D12, D81)

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