Nonlinear Preferences and Two-Stage Lotteries: Theories and Evidence

Michele Bernasconi

49 citations0/0 files storedThe Economic Journal

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Decision-Making and Behavioral Economics Economic and Environmental Valuation Experimental Behavioral Economics Studies

Abstract

Nonlinear preferences models are theories for choice under risk which have weakened in one way or another the Independence Axiom of Expected Utility. In this paper we present an experiment designed to discriminate between some basic ideas in this literature. We tested the Betweenness axiom, a weaker form of Independence, against an alternative which predicts that indifference curves in the probabilities simplex are convex along the lower edge and concave along the hypotenuse. We also checked whether preferences among single-stage lotteries, as those revealed by our test of Betweenness, should be extended to preferences among two-stage lottery via the classical Reduction of Compound Lottery axiom or via the Certainty Equivalent Mechanism.

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References

1988Prospect theory: An analysis of decision under risk 1992Advances in prospect theory: Cumulative representation of uncertainty 1953Le Comportement de l'Homme Rationnel devant le Risque: Critique des Postulats et Axiomes de l'Ecole Americaine 1982Regret Theory: An Alternative Theory of Rational Choice Under Uncertainty 1982A theory of anticipated utility 1987The Dual Theory of Choice under Risk 1982"Expected Utility" Analysis without the Independence Axiom 1992Choice Under Uncertainty: Problems Solved and Unsolved

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