Utility Theory: Axioms Versus ‘Paradoxes’

MacCrimmon, Kenneth R.; Larsson, Stig

doi:10.1007/978-94-015-7629-1_15

Cited by 292 publications

(143 citation statements)

References 31 publications

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“…In a noncollapsed format, A, B, A' and B' in Table 1 can be presented as: A: 10% chance of $5m, 89% chance of $1m, and 1% chance of nothing B: $1m for certain A': 10% chance of $5m and 90% chance of nothing B': 11% chance of $1m and 89% chance of nothing Allais argued that when individuals are faced with choices between A & B and A' & B' in the non-collapsed format, many individuals will display a preference for B and A', which violates the independence axiom. Allais' proposition is known as the Allais paradox (or the common consequence effect), and has been empirically supported in subsequent analyses (Camerer, 1989;Conlisk, 1989;Kahneman & Tversky, 1979;MacCrimmon & Larsson, 1979;Morrison, 1967;Moskowitz, 1974;Slovic & Tversky, 1974). …”

Section: Introductionmentioning

confidence: 87%

A quantitative and qualitative test of the Allais paradox using health outcomes

Oliver

2003

Journal of Economic Psychology

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A quantitative and qualitative test of the Allais paradox using health outcomes AbstractThere have been many tests of the descriptive validity of the axioms of expected utility theory (EU) using money outcomes. Such tests are relatively uncommon with respect to health outcomes. This is unfortunate, because the standard gambleconsidered by many health economists to be the gold standard for cardinal health state value assessment -is implied from the axioms of EU. In this paper, the classic Allais paradox, which predicts a systematic violation of the independence axiom, is tested in the context of health outcomes. Seventeen of 38 participants demonstrated strict violations of independence, with 14 of these violating in the direction predicted by Allais. The violations were thus significant and systematic. Moreover, the participants' qualitative explanations for their behaviour show seemingly rational and not inconsistent reasoning for the violations. This evidence offers a further challenge to the descriptive validity of EU, and underlines the need to test alternative theories of risk and uncertainty in the context of health outcomes.

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Section: Introductionmentioning

confidence: 87%

A quantitative and qualitative test of the Allais paradox using health outcomes

Oliver

2003

Journal of Economic Psychology

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“…Allais 1953, MacCrimmon and Larsson 1979, Chew and Waller 1986, Wu 1994) that a significant majority of people exhibited a preference for A 1 in the first choice problem and a preference for B 2 in the second choice problem. Substituting EU immediately reveals that this leads to a conflicting relationship.…”

Section: Common Ratio Invariant Preferencesmentioning

confidence: 99%

“…In problem 3 the choice is between It has been observed in experiments that a significant majority of people exhibit a preference for A 3 in the former choice problem and a preference for B 4 in the latter choice problem (e.g. Allais 1953, MacCrimmon and Larsson 1979, Chew and Waller 1986, Wu 1994, but see also related evidence in Wakker, Erev and Weber 1994, Birnbaum and Navarette 1998, Birnbaum 2004 In the common consequence paradox the interpretation is that people are sensitive to replacing the good common consequence of getting "1 Million with probability 0.89" with a bad common consequence of getting "0 with probability 0.89." Therefore, also replacement separability (Machina 1989) is violated.…”

Section: Extreme Replacement Separabilitymentioning

confidence: 99%

Parametric weighting functions

Diecidue

Schmidt

Zank

2009

Journal of Economic Theory

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract. This paper provides behavioral foundations for parametric weighting functions under rankdependent utility. This is achieved by decomposing the independence axiom of expected utility into separate meaningful properties. These conditions allow us to characterize rank-dependent utility with power and exponential weighting functions. Moreover, by restricting the conditions to subsets of the probability interval, foundations of rank-dependent utility with parametric inverse-S shaped weighting functions are obtained. Terms of use: Documents in EconStor may

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“…8 If one views adherence to the compound lottery axiom as a requirement of rationality, then the results in Halevy (2007) show that ambiguity aversion is absent among those who are rational in this sense. 9 A probability-matching approach is also used in MacCrimmon and Larsson (1979), Kahn and Sarin (1988), and Viscusi and Magat (1992). Dimmock et al (2015) provide theoretical support for this method.…”

Section: Methodsmentioning

confidence: 99%

Ambiguity attitudes, framing, and consistency

Voorhoeve¹,

Binmore

Stefánsson

et al. 2016

Theory Decis

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We use probability-matching variations on Ellsberg's single-urn experiment to assess three questions: (1) How sensitive are ambiguity attitudes to changes from a gain to a loss frame? (2) How sensitive are ambiguity attitudes to making ambiguity easier to recognize? (3) What is the relation between subjects' consistency of choice and the ambiguity attitudes their choices display? Contrary to most other studies, we find that a switch from a gain to a loss frame does not lead to a switch from ambiguity aversion to ambiguity neutrality and/or ambiguity seeking. We also find that making ambiguity easier to recognize has little effect. Finally, we find that while ambiguity aversion does not depend on consistency, other attitudes do: consistent choosers are much more likely to be ambiguity neutral, while ambiguity seeking is much more frequent among highly inconsistent choosers.

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Utility Theory: Axioms Versus ‘Paradoxes’

Cited by 292 publications

References 31 publications

A quantitative and qualitative test of the Allais paradox using health outcomes

A quantitative and qualitative test of the Allais paradox using health outcomes

Parametric weighting functions

Ambiguity attitudes, framing, and consistency

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