Non-Expected Utility Theories: Weighted Expected, Rank Dependent, and, Cumulative Prospect Theory Utility by

Non-expected Utility Theories: Weighted Expected, Rank Dependent, and, Cumulative Prospect Theory Utility

Testing the Predictions of Decision Theories in a Natural Experiment When Half a Million Is at Stake

In the television show Affari Tuoi an individual faces a sequence of binary choices between a risky lottery with equiprobable prizes of up to half a million euros and a monetary amount for certain. The decisions of 114 show participants are used to test the predictions of ten decision theories: risk neutrality, expected utility theory, fanning-out hypothesis (weighted utility theory, transitive...

Conditioning and Updating under Cumulative Prospect Theory

Under expected utility theory, unconditional expected utility can be decomposed into a weighted sum of conditional expected utilities where the weights are marginal probabilities. We derive necessary and sufficient conditions for a similar decomposition in the framework of Cumulative Prospect Theory (CPT). The conditions also ensure that a decision maker’s conditional preferences (given some ev...

Is There A Plausible Theory for Risky Decisions?

A large literature is concerned with analysis and empirical application of theories of decision making for environments with risky outcomes. Expected value theory has been known for centuries to be subject to critique by St. Petersburg paradox arguments. More recently, theories of risk aversion have been critiqued with calibration arguments applied to concave utility of payoffs. This paper exte...

An extension of the Becker proposition to non-expected utility theory

In a seminal paper, Becker (1968) showed that the most effi cient way to deter crime is to impose the severest possible penalty (to maintain adequate deterrence) with the lowest possible probability (to economize on costs of enforcement). We shall call this the Becker proposition (BP). The BP is derived under the assumptions of expected utility theory (EU). However, EU is heavily rejected by th...