TY - JOUR
T1 - An experimental comparison of risky and riskless choice-limitations of prospect theory and expected utility theory
AU - Chung, Hui Kuan
AU - Glimcher, Paul
AU - Tymula, Agnieszka
N1 - Funding Information:
* Chung: Department of Psychology, New York University, 6 Washington Place, room 907, New York, NY 10003 (email: [email protected]); Glimcher: Department of Neuroscience and Physiology, NYU School of Medicine, 435 East 30th Street, New York, NY 10016 (email: [email protected]); Tymula: School of Economics, University of Sydney, H04—Merewether, room 370, Sydney, NSW 2006, Australia (email: agnieszka.tymula@ sydney.edu.au). John Asker was coeditor for this article. We would like to thank Ryan Webb, Kai Steverson, Mel Win Khaw, and Stephen Cheung for helpful comments, and the participants at the 2015 Annual Meeting of the Society for Neuroeconomics, Sydney Experimental Brownbag Seminar, the 2015 Annual Meeting of the Society for Neuroscience, and the 2016 Foundations of Utility and Risk (FUR) Conference for valuable comments. The research was sponsored from NIH-NINDS-NS054775 grant awarded to P.W.G. A.T. acknowledges the salary support from the ARC-DE150101032 grant while working on this project.
Publisher Copyright:
© 2019 American Economic Association.
PY - 2018
Y1 - 2018
N2 - 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.
AB - 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.
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U2 - 10.1257/mic.20170112
DO - 10.1257/mic.20170112
M3 - Article
AN - SCOPUS:85071164166
SN - 1945-7669
VL - 11
SP - 34
EP - 67
JO - American Economic Journal: Microeconomics
JF - American Economic Journal: Microeconomics
IS - 3
ER -