American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory
American Economic Journal: Microeconomics
vol. 11,
no. 3, August 2019
(pp. 34–67)
Abstract
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.Citation
Chung, Hui-Kuan, Paul Glimcher, and Agnieszka Tymula. 2019. "An Experimental Comparison of Risky and Riskless Choice—Limitations of Prospect Theory and Expected Utility Theory." American Economic Journal: Microeconomics, 11 (3): 34–67. DOI: 10.1257/mic.20170112Additional Materials
JEL Classification
- C91 Design of Experiments: Laboratory, Individual
- D12 Consumer Economics: Empirical Analysis
- D81 Criteria for Decision-Making under Risk and Uncertainty
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