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Random expected utility and certainty equivalents: mimicry of probability weighting functions

Published online by Cambridge University Press:  01 January 2025

Nathaniel T. Wilcox
Nathaniel T. Wilcox*
Affiliation:
Economic Science Institute, Chapman University, Orange, CA 92866, USA
*
e-mail: [email protected]
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Abstract

For simple prospects routinely used for certainty equivalent elicitation, random expected utility preferences imply a conditional expectation function that can mimic deterministic rank-dependent preferences. That is, a subject with random expected utility preferences can have expected certainty equivalents exactly like those predicted by rank-dependent probability weighting functions of the inverse-s shape discussed by Quiggin (J Econ Behav Organ 3:323–343, 1982) and advocated by Tversky and Kahneman (J Risk Uncertainty 5:297–323, 1992), Prelec (Econometrica 66:497–527, 1998) and other scholars. Certainty equivalents may not nonparametrically identify preferences: Their conditional expectation (and critically, their interpretation) depends on assumptions concerning the source of their variability.

Keywords

Certainty equivalenceIdentificationPreference estimationPreference measurementRandom preferenceChoice under risk and uncertainty

JEL classification

C91: Laboratory, Individual Behavior D81: Criteria for Decision-Making under Risk and Uncertainty C81: Methodology for Collecting, Estimating, and Organizing Microeconomic Data • Data Access
Type
Original Paper
Information
Journal of the Economic Science Association , Volume 3 , Issue 2 , December 2017 , pp. 161 - 173
Copyright
Copyright © Economic Science Association 2017

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s40881-017-0042-1) contains supplementary material, which is available to authorized users.

I am grateful to the Economic Science Institute and Chapman University for their ongoing support. Jose Apesteguia, Mattias Del Campo Axelrod, Miguel A. Ballester, Sudeep Bhatia, Michael Birnbaum, Daniel Cavagnaro, Mark DeSantis, Glenn W. Harrison, Anthony Marley, Kevin Mumford, John P. Nolan and Mark Schneider provided help or commentary, though none are responsible for remaining errors.

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