An Empirical Assessment of Alternative Models of Risky Decision Making, Issue 2717
National Bureau of Economic Research, 1988 - Decision-making - 20 pages
In this paper, we assess the degree to which four of the most commonly used models of risky decision making can explain the choices individuals make when faced with risky prospects. To make this assessment, we use experimental evidence for two random samples of young adults. Using a robust, nonlinear least squares procedure, we estimate a model that is general enough to approximate Kahnenman and Tversky's prospect theory and that for certain parametric values will yield the expected utility model, a subjective expected utility model and a probability-transform model. We find that the four models considered explain the decision-making behavior of the majority of our subjects. Surprisingly, we find that the choice behavior of the largest number of subjects is consistent with a probability-transform model. Such models have only been developed recently and have not been used in applied settings. We find least support for the expected utility model -- the most widely used model of risky decision making
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alternative models Andrei Shleifer ASSESSMENT OF ALTERNATIVE attitudes toward risk Bureau of Economic Business Cycle certainty equivalent concave convex convex function decision maker decision weighting function decision-making behavior depicted in panel Economic Research Elhanan Helpman EMPIRICAL ASSESSMENT Exchange Rate expected utility model Expected Utility risk expected value model Figure find least support function that transforms gains and losses gains scenarios Handa Handa's model interactive computer program Kahneman and Tversky largest number loss scenarios loss settings model of risky models we consider nonlinear least squares null hypothesis number of subjects objective probabilities outcome transform outcomes are transformed overweight probabilities parametric values percent plea bargain probability-transform model prospect theory model relative explanatory power results indicate Risk Neutrality risk seeking risky decision risky prospect Robert subadditive subjective expected utility subjects 9 subjects subjects overweight Takatoshi Ito transform of probabilities transforms outcomes transforms probabilities Tversky's model underweight probabilities value function widely used model Yaari