Journal of Economic Methodology 24 (2):150-165 (2017)

Much behavioral welfare economics assumes that expected utility theory does not accurately describe most human choice under risk. A substantial literature instead evaluates welfare consequences by taking cumulative prospect theory as the natural default alternative, at least where description is concerned. We present evidence, based on a review of previous literature and new experimental data, that the most empirically adequate hypothesis about human choice under risk is that it is heterogeneous, and that where EUT does not apply, more choice is characterized by rank-dependent utility models than by CPT. Most of the apparently loss-averse choice behavior results from probability weighting rather than from direct disutility experienced when an outcome is framed as a loss against an idiosyncratic reference point. We then consider implications of this finding for methodological debates about how to model welfare effects of policies, and argue that abandonment of a dogmatic belief in CPT as the correct theory of risk human choice exposes a conceptual error that is widespread in behavioral welfare economics. We provide concluding reflections on second-order, philosophical issues around the grounding of normative commitments in policy-focused economics.
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DOI 10.1080/1350178X.2017.1309753
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References found in this work BETA

The Foundations of Statistics.Leonard J. Savage - 1959 - Synthese 11 (1):86-89.
Explaining Behaviour.F. Dretske - 1993 - British Journal for the Philosophy of Science 44 (1):157-165.

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Risk.Sven Ove Hansson - 2008 - Stanford Encyclopedia of Philosophy.
Reflections on the 2017 Nobel Memorial Prize Awarded to Richard Thaler.Till Grüne-Yanoff - 2017 - Erasmus Journal for Philosophy and Economics 10 (2):61-75.

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