Revealed preference tests for linear probability-prize tradeoffs

Abstract

Abstract We provide necessary and sufficient conditions for expected utility and risk-averse expected utility to rationalize behavior when the decision maker faces linear probability-prize tradeoffs. The setting subsumes those proposed in Andreoni and Harbaugh (Unexpected utility: Five experimental tests of preferences for risk, 2009)—risk-reward budgets—and Crosetto and Filippin (J Risk Uncertain 47(1):31–65, 2013)—bomb risk elicitation tasks. The tests are intuitive and straightforward to carry out. They also make it possible to compute the Houtman–Maks Index to measure how close the models come to explaining the choice sets, although we emphasize the limitations of these measures in this setting. We implement these results empirically and show that only small portions of choice sets can be rationalized by risk-averse expected utility.

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