There are decision problems where the preferences that seem rational to many people cannot be accommodated within orthodox decision theory in the natural way. In response, a number of alternatives to the orthodoxy have been proposed. In this paper, I offer an argument against those alternatives and in favour of the orthodoxy. I focus on preferences that seem to encode sensitivity to risk. And I focus on the alternative to the orthodoxy proposed by Lara Buchak’s risk-weighted (...) expected utility theory. I will show that the orthodoxy can be made to accommodate all of the preferences that Buchak’s theory can accommodate. (shrink)

Some early phase clinical studies of candidate HIV cure and remission interventions appear to have adverse medical risk–benefit ratios for participants. Why, then, do people participate? And is it ethically permissible to allow them to participate? Recent work in decision theory sheds light on both of these questions, by casting doubt on the idea that rational individuals prefer choices that maximise expected utility, and therefore by casting doubt on the idea that researchers have an ethical obligation (...) not to enrol participants in studies with high risk–benefit ratios. This work supports the view that researchers should instead defer to the considered preferences of the participants themselves. This essay briefly explains this recent work, and then explores its application to these two questions in more detail. (shrink)

No existing normative decision theory adequately handles risk. Expected Utility Theory is overly restrictive in prohibiting a range of reasonable preferences. And theories designed to accommodate such preferences (for example, Buchak's (2013) Risk‐Weighted Expected Utility Theory) violate the Betweenness axiom, which requires that you are indifferent to randomizing over two options between which you are already indifferent. Betweenness has been overlooked by philosophers, and we argue that it is a compelling (...) normative constraint. Furthermore, neither Expected nor Risk‐Weighted Expected Utility Theory allow for stakes‐sensitive risk‐attitudes—they require that risk matters in the same way whether you are gambling for loose change or millions of dollars. We provide a novel normative interpretation of Weighted‐Linear Utility Theory that solves all of these problems. (shrink)

This article argues that Lara Buchak’s risk-weighted expected utility (REU) theory fails to offer a true alternative to expected utility theory. Under commonly held assumptions about dynamic choice and the framing of decision problems, rational agents are guided by their attitudes to temporally extended courses of action. If so, REU theory makes approximately the same recommendations as expected utility theory. Being more permissive about dynamic choice or framing, however, (...) undermines the theory’s claim to capturing a steady choice disposition in the face of risk. I argue that this poses a challenge to alternatives to expected utility theory more generally. (shrink)

Ramsey (1926) sketches a proposal for measuring the subjective probabilities of an agent by their observable preferences, assuming that the agent is an expected utility maximizer. I show how to extend the spirit of Ramsey's method to a strictly wider class of agents: risk-weighted expected utility maximizers (Buchak 2013). In particular, I show how we can measure the risk attitudes of an agent by their observable preferences, assuming that the agent is a (...) class='Hi'>risk-weighted expected utility maximizer. Further, we can leverage this method to measure the subjective probabilities of a risk-weighted expected utility maximizer. (shrink)

I have claimed that risk-weighted expected utility maximizers are rational, and that their preferences cannot be captured by expected utility theory. Richard Pettigrew and Rachael Briggs have recently challenged these claims. Both authors argue that only EU-maximizers are rational. In addition, Pettigrew argues that the preferences of REU-maximizers can indeed be captured by EU theory, and Briggs argues that REU-maximizers lose a valuable tool for simplifying their decision problems. I hold that their (...) arguments do not succeed and that my original claims still stand. However, their arguments do highlight some costs of REU theory. (shrink)

When you are indifferent between two options, it’s rationally permissible to take either. One way to decide between two such options is to flip a fair coin, taking one option if it lands heads and the other if it lands tails. Is it rationally permissible to employ such a tie-breaking procedure? Intuitively, yes. However, if you are genuinely risk-averse—in particular, if you adhere to risk-weighted expected utility theory (Buchak in Risk and rationality, Oxford (...) University Press, 2013) and have a strictly convex risk-function—the answer will often be no: the REU of deciding by coin-flip will be lower than the REU of choosing one of the options outright (so long as at least one of the options is a nondegenerate gamble). This turns out to be a significant worry for risk-weighted expected utility theory. I argue that it adds real bite to established worries about diachronic consistency afflicting views, like risk-weighted expected utility theory, that violate Independence. And that, while these worries might be surmountable, surmounting them comes at a price. (shrink)

The paper summarizes expected utility theory, both in its original von Neumann-Morgenstern version and its later developments, and discusses the normative claims to rationality made by this theory.

Chateauneuf and Faro axiomatize a weighted version of maxmin expected utility over acts with nonnegative utilities, where weights are represented by a confidence function. We argue that their representation is only one of many possible, and we axiomatize a more natural form of maxmin weighted expected utility. We also provide stronger uniqueness results.

The orthodox theory of instrumental rationality, expected utility (EU) theory, severely restricts the way in which risk-considerations can figure into a rational individual's preferences. It is argued here that this is because EU theory neglects an important component of instrumental rationality. This paper presents a more general theory of decision-making, risk-weighted expected utility (REU) theory, of which expected utility maximization is a special case. According to REU (...) theory, the weight that each outcome gets in decision-making is not the subjective probability of that outcome; rather, the weight each outcome gets depends on both its subjective probability and its position in the gamble. Furthermore, the individual's utility function, her subjective probability function, and a function that measures her attitude towards risk can be separately derived from her preferences via a Representation Theorem. This theorem illuminates the role that each of these entities plays in preferences, and shows how REU theory explicates the components of instrumental rationality. (shrink)

Risk-weighted expected utility theory is motivated by small-world problems like the Allais paradox, but it is a grand-world theory by nature. And, at the grand-world level, its ability to handle the Allais paradox is dubious. The REU model described in Risk and Rationality turns out to be risk-seeking rather than risk-averse on one natural way of formulating the Allais gambles in the grand-world context. This result illustrates a general problem with the (...) case for REU theory, we argue. There is a tension between the small-world thinking marshaled against standard expected utility theory, and the grand-world thinking inherent to the risk-weighted alternative. (shrink)

This paper merges the non-expected utility approach (Tversky and Kahneman, J Risk Uncertain 5:297–323, 1992 and Quiggin, J Econ Behav Organ 3:323–343, 1982) into Akerlof’s (Quart J Econ 84:488–500, 1970) model of Market for Lemons. We derive the results for different probability weighting functions and analyze the phenomenon of market failure in light of non-expected utility maximization. Our main finding suggests that when the proportion of traded lemons is high (low), the problem of market failure (...) is mitigated (enhanced). In addition, for the case of Cumulative Prospect Theory, we show that (a) the higher the loss aversion is, the more pronounced is the market failure; (b) gain-domain elevation is negatively related to the extent of market failure; and (c) the value function is (i) negatively monotonic in the gain-domain diminishing sensitivity parameter when the market is characterized by a high proportion of “peaches,” and (ii) positively monotonic in the loss-domain diminishing sensitivity parameter when the market is characterized by a high proportion of “lemons.”. (shrink)

The paper re-expresses arguments against the normative validity of expected utility theory in Robin Pope (1983, 1991a, 1991b, 1985, 1995, 2000, 2001, 2005, 2006, 2007). These concern the neglect of the evolving stages of knowledge ahead (stages of what the future will bring). Such evolution is fundamental to an experience of risk, yet not consistently incorporated even in axiomatised temporal versions of expected utility. Its neglect entails a disregard of emotional and financial effects on (...) well-being before a particular risk is resolved. These arguments are complemented with an analysis of the essential uniqueness property in the context of temporal and atemporal expected utility theory and a proof of the absence of a limit property natural in an axiomatised approach to temporal expected utility theory. Problems of the time structure of risk are investigated in a simple temporal framework restricted to a subclass of temporal lotteries in the sense of David Kreps and Evan Porteus (1978). This subclass is narrow but wide enough to discuss basic issues. It will be shown that there are serious objections against the modification of expected utility theory axiomatised by Kreps and Porteus (1978, 1979). By contrast the umbrella theory proffered by Pope that she has now termed SKAT, the Stages of Knowledge Ahead Theory, offers an epistemically consistent framework within which to construct particular models to deal with particular decision situations. A model by Caplin and Leahy (2001) will also be discussed and contrasted with the modelling within SKAT (Pope, Leopold and Leitner 2007). (shrink)

Ellsberg (The Quarterly Journal of Economics 75, 643–669 (1961); Risk, Ambiguity and Decision, Garland Publishing (2001)) argued that uncertainty is not reducible to risk. At the center of Ellsberg’s argument lies a thought experiment that has come to be known as the three-color example. It has been observed that a significant number of sophisticated decision makers violate the requirements of subjective expected utility theory when they are confronted with Ellsberg’s three-color example. More generally, such decision (...) makers are in conflict with either the ordering assumption or the independence assumption of subjective expected utility theory. While a clear majority of the theoretical responses to these violations have advocated maintaining ordering while relaxing independence, a persistent minority has advocated abandoning the ordering assumption. The purpose of this paper is to consider a similar dilemma that exists within the context of multiattribute models, where it arises by considering indeterminacy in the weighting of attributes rather than indeterminacy in the determination of probabilities as in Ellsberg’s example. (shrink)

It is widely held that the influence of risk on rational decisions is not entirely explained by the shape of an agent’s utility curve. Buchak (Erkenntnis, 2013, Risk and rationality, Oxford University Press, Oxford, in press) presents an axiomatic decision theory, risk-weighted expected utility theory (REU), in which decision weights are the agent’s subjective probabilities modified by his risk-function r. REU is briefly described, and the global applicability of r is (...) discussed. Rabin’s (Econometrica 68:1281–1292, 2000) calibration theorem strongly suggests that plausible levels of risk aversion cannot be fully explained by concave utility functions; this provides motivation for REU and other theories. But applied to the synchronic preferences of an individual agent, Rabin’s result is not as problematic as it may first appear. Theories that treat outcomes as gains and losses (e.g. prospect theory and cumulative prospect theory) account for risk sensitivity in a way not available to REU. Reference points that mark the difference between gains and losses are subject to framing, many instances of which cannot be regarded as rational. However, rational decision theory may recognize the difference between gains and losses, without endorsing all ways of fixing the point of reference. In any event, REU is a very interesting theory. (shrink)

A review of some major topics of debate in normative decision theory from circa 2007 to 2019. Topics discussed include the ongoing debate between causal and evidential decision theory, decision instability, risk-weighted expected utility theory, decision-making with incomplete preferences, and decision-making with imprecise credences.

Lara Buchak sets out a new account of rational decision-making in the face of risk. She argues that the orthodox view is too narrow, and suggests an alternative, more permissive theory: one that allows individuals to pay attention to the worst-case or best-case scenario, and vindicates the ordinary decision-maker.

We use the multiple price list method and a recursive expected utility theory of smooth ambiguity to separate out attitude towards risk from that towards ambiguity. Based on this separation, we investigate if there are differences in agent behaviour under uncertainty over gain amounts vis-a-vis uncertainty over loss amounts. On an aggregate level, we find that (i) subjects are risk averse over gains and risk seeking over losses, displaying a “reflection effect” and (ii) they (...) are ambiguity neutral over gains and are mildly ambiguity seeking over losses. Further analysis shows that on an individual level, and with respect to both risky and ambiguous prospects, there is limited incidence of a reflection effect where subjects are risk/ambiguity averse (seeking) in gains and seeking (averse) in losses, though this incidence is higher for ambiguous prospects. A very high proportion of such cases of reflection exhibit risk (ambiguity) aversion in gains and risk (ambiguity) seeking in losses, with the reverse effect being significantly present in the case of risk but almost absent in case of ambiguity. Our results suggest that reflection across gains and losses is not a stable individual characteristic, but depends upon whether the form of uncertainty is precise or ambiguous, since we rarely find an individual who exhibits reflection in both risky and ambiguous prospects. We also find that correlations between attitudes towards risk and ambiguity were domain dependent. (shrink)

In comparing different risk elicitation methods under the assumptions of expected utility theory, previous studies have found significant differences in the elicited risk attitudes. This paper extends this line of research to consider cumulative prospect theory by comparing risk attitudes and probability weightings determined using two elicitation methods: the method by Tanaka et al. :557–571, 2010; TCN method) and the method by Wakker and Deneffe :1131–1150, 1996; WD method). We demonstrate that the two (...) methods reveal significantly different mean values for the measured risk attitudes. Participants are classified on average as moderately risk-averse using the TCN method, whereas the same individuals are classified as nearly risk-neutral using the WD method. Moreover, we find that on average, participants overweight low probabilities and underweight high probabilities to a greater extent with the WD method than with the TCN method. Therefore, the different elicitation methods, that both consider probability weighting, can lead to different measured values of risk attitude and probability weighting. (shrink)

Can it be rational to be risk-averse? It seems plausible that the answer is yes—that normative decision theory should accommodate risk aversion. But there is a seemingly compelling class of arguments against our most promising methods of doing so. These long-run arguments point out that, in practice, each decision an agent makes is just one in a very long sequence of such decisions. Given this form of dynamic choice situation, and the (Strong) Law of Large Numbers, they (...) conclude that those theories which accommodate risk aversion end up delivering the same verdicts as risk-neutral theories in nearly all practical cases. If so, why not just accept a simpler, risk-neutral theory? The resulting practical verdicts seem to be much the same. In this paper, I show that these arguments do not in fact condemn those risk-aversion-accommodating theories. Risk aversion can indeed survive the long run. (shrink)

This paper presents a personal view of the interaction between the analysis of choice under uncertainty and the analysis of production under uncertainty. Interest in the foundations of the theory of choice under uncertainty was stimulated by applications of expected utility theory such as the Sandmo model of production under uncertainty. This interest led to the development of generalized models including rank-dependent expected utility theory. In turn, the development of generalized expected (...) class='Hi'>utility models raised the question of whether such models could be used in the analysis of applied problems such as those involving production under uncertainty. Finally, the revival of the state-contingent approach led to the recognition of a fundamental duality between choice problems and production problems. (shrink)

Risk-weighted expected utility theory permits preferences which violate the Sure-Thing Principle. But preferences that violate the STP can lead to bad decisions in sequential choice problems. In particular, they can lead decision-makers to adopt a strategy that is dominated – i.e. a strategy such that some available alternative leads to a better outcome in every possible state of the world.

We present experimental evidence that supports the thesis :602–625, 2015, Br J Philos Sci 70:77–102, 2019; Bradley in Decisions theory with a human face, Cambridge University Press, Cambridge, 2017; Goldschmidt and Nissan-Rozen in Synthese 198:7553–7575, 2021) that people might positively or negatively desire risky prospects conditional on only some of the prospects’ outcomes obtaining. We argue that this evidence has important normative implications for the central debate in normative decision theory between two general approaches on how to rationalize (...) several common patterns of preference, which are ruled out as irrational by orthodox decision theory, namely the re-individuation approach and the non-expected utility approach. (shrink)

Recently, Martin Smith defended a view he called the “normic de minimis expected utility theory”. The basic idea is to integrate a ‘normic’ version of the de minimis principle into an expected utility-based decision theoretical framework. According to the de minimis principle some risks are so small (falling below a threshold) that they can be ignored. While this threshold standardly is defined in terms of some probability, the normic conception of de minimis defines this threshold (...) in terms of abnormality. In this article, we present three independent arguments against the normic de minimis expected utility theory, focusing on its reliance on the de minimis principle. (shrink)

Two key questions of normative decision theory are: 1) whether the probabilities relevant to decision theory are evidential or causal; and 2) whether agents should be risk-neutral, and so maximise the expected value of the outcome, or instead risk-averse (or otherwise sensitive to risk). These questions are typically thought to be independent---that our answer to one bears little on our answer to the other. But there is a surprising argument that they are not. In (...) this paper, I show that evidential decision theory implies risk neutrality, at least in moral decision-making and at least on plausible empirical assumptions. Take any risk-aversion-accommodating decision theory, apply it using the probabilities prescribed by evidential decision theory, and every verdict of moral betterness you reach will match those of expected value theory. (shrink)

A natural view in distributive ethics is that everyone's interests matter, but the interests of the relatively worse off matter more than the interests of the relatively better off. I provide a new argument for this view. The argument takes as its starting point the proposal, due to Harsanyi and Rawls, that facts about distributive ethics are discerned from individual preferences in the "original position." I draw on recent work in decision theory, along with an intuitive principle about (...) class='Hi'>risk-taking, to derive the view. (shrink)

My book Risk and Rationality argues for a new alternative to the orthodox theory of rational decision-making. This alternative, risk-weighted expected utility maximization, holds that there are three important components involved in rational decision-making: utilities, probabilities, and risk-attitudes. This essay explains the basic outline of the theory and precisely how it differs from the orthodox theory. It also summarizes the main threads of argument in the book.

Elicitation methods in decision-making under risk allow us to infer the utilities of outcomes as well as the probability weights from the observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes the inevitable distortion of preferences by random errors into account and minimizes the effect of such errors on the inferred utility and probability weighting functions. Under mild assumptions, the optimally efficient method for eliciting utilities and probability weights is the following three-stage procedure. (...) First, a probability is elicited whose subjective weight is one half. Second, the utility function is elicited through the midpoint chaining certainty equivalent method using the probability elicited at the first stage. Finally, the probability weighting function is elicited through the probability equivalent method. (shrink)

We give two social aggregation theorems under conditions of risk, one for constant population cases, the other an extension to variable populations. Intra and interpersonal welfare comparisons are encoded in a single ‘individual preorder’. The theorems give axioms that uniquely determine a social preorder in terms of this individual preorder. The social preorders described by these theorems have features that may be considered characteristic of Harsanyi-style utilitarianism, such as indifference to ex ante and ex post equality. However, the theorems (...) are also consistent with the rejection of all of the expected utility axioms, completeness, continuity, and independence, at both the individual and social levels. In that sense, expected utility is inessential to Harsanyi-style utilitarianism. In fact, the variable population theorem imposes only a mild constraint on the individual preorder, while the constant population theorem imposes no constraint at all. We then derive further results under the assumption of our basic axioms. First, the individual preorder satisfies the main expected utility axiom of strong independence if and only if the social preorder has a vector-valued expected total utility representation, covering Harsanyi’s utilitarian theorem as a special case. Second, stronger utilitarian-friendly assumptions, like Pareto or strong separability, are essentially equivalent to strong independence. Third, if the individual preorder satisfies a ‘local expected utility’ condition popular in non-expected utility theory, then the social preorder has a ‘local expected total utility’ representation. Fourth, a wide range of non-expected utility theories nevertheless lead to social preorders of outcomes that have been seen as canonically egalitarian, such as rank-dependent social preorders. Although our aggregation theorems are stated under conditions of risk, they are valid in more general frameworks for representing uncertainty or ambiguity. (shrink)

In the 1940s and 1950s thousands of lobotomies were performed on people with mental disorders. These operations were known to be dangerous, but thought to offer great hope. Nowadays, the lobotomies of the 1940s and 1950s are widely condemned. The consensus is that the practitioners who employed them were, at best, misguided enthusiasts, or, at worst, evil. In this paper I employ standard decision theory to understand and assess shifts in the evaluation of lobotomy. Textbooks of medical decision making (...) generally recommend that decisions under risk are made so as to maximise expected utility (MEU) I show that using this procedure suggests that the 1940s and 1950s practice of psychosurgery was justifiable. In making sense of this finding we have a choice: Either we can accept that psychosurgery was justified, in which case condemnation of the lobotomists is misplaced. Or, we can conclude that the use of formal decision procedures, such as MEU, is problematic. (shrink)

To understand how small business entrepreneurs respond to government policy one has to know their risk and time preferences. Are they risk averse, or have high discount rates, such that they are hard to motivate? We have conducted a set of field experiments in Denmark that will allow a direct characterization of small business entrepreneurs in terms of these traits. We build on experimental tasks that are well established in the literature. The results do not suggest that small (...) business entrepreneurs are more or less risk averse than the general population under the assumption of Expected Utility Theory. However, we generally find an S-shaped probability weighting function for both small business entrepreneurs and non-entrepreneurs, with entrepreneurs being more optimistic about the chance of occurrence for the best outcome in lotteries with real monetary outcomes. The results also point to a significant difference in individual discount rates between entrepreneurs and non-entrepreneurs: entrepreneurs are willing to wait longer for certain rewards than the general population. (shrink)

In this paper, we provide two novel expected utility theorems by suitably adjusting the independence and continuity axioms. Our first theorem characterizes expected utility preferences using weak versions of the independence axiom (with varying mixture weights) and a new weak continuity axiom. Our second theorem characterizes these preferences using weaker versions of the independence axiom (with mixture weights fixed at 1/2) and a strong topological continuity axiom. We provide useful examples to illustrate the tightness of these (...) characterizations. (shrink)

A generalization of the usual approach to the expected utility theory is given, with the aim of representing the state of belief of an agent who may decline on grounds of ignorance to express a preference between a given pair of acts and would, therefore, be considered irrational from a Bayesian point of view. Taking state, act, and outcome as primitive concepts, a utility function on the outcomes is constructed in the usual way. Each act is (...) represented by a utility-valued function on the states — but not all such functions are taken to represent acts. A weaker than usual set of axioms on preferences between acts is now postulated. It is shown that any agent can be represented by a risk function that assigns to each (mixed) state a number that gives the maximum loss (in utility) the agent might expect should be the actual state of the world. The form of the risk function is determined, both in general and in important particular cases. The results show that any rational agent behaves as though he were acting under the guidance of a set of Bayesian (or, more generally, pseudo-Bayesian) advisors. (shrink)

Prospect Theory (PT) is widely regarded as the most promising descriptive model for decision making under uncertainty. Various tests have corroborated the validity of the characteristic fourfold pattern of risk attitudes implied by the combination of probability weighting and value transformation. But is it also safe to assume stable PT preferences at the individual level? This is not only an empirical but also a conceptual question. Measuring the stability of preferences in a multi-parameter decision model such as PT (...) is far more complex than evaluating single-parameter models such as Expected Utility Theory under the assumption of constant relative risk aversion. There exist considerable interdependencies among parameters such that allegedly diverging parameter combinations could in fact produce very similar preference structures. In this paper, we provide a theoretic framework for measuring the (temporal) stability of PT parameters. To illustrate our methodology, we further apply our approach to 86 subjects for whom we elicit PT parameters twice, with a time lag of 1 month. While documenting remarkable stability of parameter estimates at the aggregate level, we find that a third of the subjects show significant instability across sessions. (shrink)

Numerous studies have convincingly shown that prospect theory can better describe risky choice behavior than the classical expected utility model because it makes the plausible assumption that risk aversion is driven not only by the degree of sensitivity toward outcomes, but also by the degree of sensitivity toward probabilities. This article presents the results of an experiment aimed at testing whether agents become more sensitive toward probabilities over time when they repeatedly face similar decisions, receive feedback (...) on the consequences of their decisions, and are given ample incentives to reflect on their decisions, as predicted by Plott’s Discovered Preference Hypothesis (DPH). The results of a laboratory experiment with N = 62 participants support this hypothesis. The elicited subjective probability weighting function converges significantly toward linearity when respondents are asked to make repeated choices and are given direct feedback after each choice. Such convergence to linearity is absent in an experimental treatment where respondents are asked to make repeated choices but do not experience the resolution of risk directly after each choice, as predicted by the DPH. (shrink)

By means of minimal assumptions on the individual preferences, I show that the Willingness To Pay (WTP) for both a FSD and SSD reduction of risk is the sum of a mean effect, a pure risk effect and a wealth effect. As a result, the WTP of a risk-averse decision maker may be lower than the WTP of a risk-neutral one, for a large class of individual preferences’ representation and a large class of risks.

I reply to two commentaries—one by Johanna Thoma and Jonathan Weisberg and one by James M. Joyce—concerning how risk-weighted expected utility theory handles the Allais preferences and Dutch books.

In this paper, a problem for utility theory - that it would have an agent who was compelled to play “Russian Roulette’ with one revolver or another, to pay as much to have a six-shooter with four bullets relieved of one bullet before playing with it, as he would be willing to pay to have a six-shooter with two bullets emptied - is reviewed. A less demanding Bayesian theory is described, that would have an agent maximize (...) class='Hi'>expected values of possible total consequence of his actions. And utility theory is located within that theory as valid for agents who satisfy certain formal conditions, that is, for agents who are, in terms of that more general theory, indifferent to certain dimensions of ‘risk’. Raiffa- and Savage-style arguments for its more general validity are then resisted. Addenda are concerned with implications for game theory, and relations between ‘utilities’ and ‘values’. (shrink)

There exists no completely satisfactory theory of risk attitude in current normative decision theories. Existing notions confound attitudes to pure risk with unrelated psychological factors such as strength of preference for certain outcomes, and probability weighting. In addition traditional measures of risk attitude frequently cannot be applied to non-numerical consequences, and are not psychologically intuitive. I develop Pure Risk theory which resolves these problems – it is consistent with existing normative theories, and both internalises (...) and generalises the intuitive notion of risk being related to the probability of not achieving one’s aspirations. Existing models which ignore pure risk attitudes may be misspecified, and effects hitherto modelled as loss aversion or utility curvature may be due instead to Pure Risk attitudes. (shrink)

Numerous studies have convincingly shown that prospect theory can better describe risky choice behavior than the classical expected utility model because it makes the plausible assumption that risk aversion is driven not only by the degree of sensitivity toward outcomes, but also by the degree of sensitivity toward probabilities. This article presents the results of an experiment aimed at testing whether agents become more sensitive toward probabilities over time when they repeatedly face similar decisions, receive feedback (...) on the consequences of their decisions, and are given ample incentives to reflect on their decisions, as predicted by Plott’s Discovered Preference Hypothesis (DPH). The results of a laboratory experiment with N = 62 participants support this hypothesis. The elicited subjective probability weighting function converges significantly toward linearity when respondents are asked to make repeated choices and are given direct feedback after each choice. Such convergence to linearity is absent in an experimental treatment where respondents are asked to make repeated choices but do not experience the resolution of risk directly after each choice, as predicted by the DPH. (shrink)

Risk attitude is known to be a key determinant of various economic and financial choices. Behavioral studies that aim to evaluate the role of risk attitudes in contexts of this type, therefore, require tools for measuring individual risk tolerance. Recent developments in decision theory provide such tools. However, the methods available can be time consuming. As a result, some practitioners might have an incentive to prefer “fast and frugal” methods to clean but more costly methods. In (...) this article, we focus on a tractable procedure initially proposed by Holt and Laury (2002) to elicit risk attitude. We generalize this method to measure utility and risk aversion as follows. First, we allow measurement of probabilistic risk attitude through violations of expected utility due to probability weighting. Second, we use the outcome scale rather than the probability scale in the menu of choices. Third, we compare sure payoffs with lotteries instead of comparing non-degenerate lotteries. A within-subject experimental study illustrates the gains in tractability and bias minimization that can result from such an extension. (shrink)

The principle that rational agents should maximize expected utility or choiceworthiness is intuitively plausible in many ordinary cases of decision-making under uncertainty. But it is less plausible in cases of extreme, low-probability risk (like Pascal's Mugging), and intolerably paradoxical in cases like the St. Petersburg and Pasadena games. In this paper I show that, under certain conditions, stochastic dominance reasoning can capture most of the plausible implications of expectational reasoning while avoiding most of its pitfalls. Specifically, given (...) sufficient background uncertainty about the choiceworthiness of one's options, many expectation-maximizing gambles that do not stochastically dominate their alternatives "in a vacuum" become stochastically dominant in virtue of that background uncertainty. But, even under these conditions, stochastic dominance will not require agents to accept options whose expectational superiority depends on sufficiently small probabilities of extreme payoffs. The sort of background uncertainty on which these results depend looks unavoidable for any agent who measures the choiceworthiness of her options in part by the total amount of value in the resulting world. At least for such agents, then, stochastic dominance offers a plausible general principle of choice under uncertainty that can explain more of the apparent rational constraints on such choices than has previously been recognized. (shrink)