Random Expected Utility and Certainty Equivalents: Mimicry of Probability Weighting Functions

Wilcox, Nathaniel (2016): Random Expected Utility and Certainty Equivalents: Mimicry of Probability Weighting Functions.

Abstract

For simple prospects of the kind routinely used for certainty equivalent elicitation, random expected utility preferences imply a conditional expectation function that can mimic deterministic rank dependent preferences. That is, an agent with random expected utility preferences can have mean certainty equivalents that look exactly like rank dependent probability weighting functions of the inverse-s shape discussed by Quiggin (1982) and later advocated by Tversky and Kahneman (1992) and other scholars. It seems that certainty equivalents cannot nonparametrically identify preferences, at least not in every relevant sense, since their conditional expectation depends on assumptions concerning the source and nature of their variability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Random Expected Utility, Certainty Equivalents, Money Equivalents, Probability Weighting, Probability Weighting Function, Weighting Function
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty

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