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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.

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Abstract

For simple prospects 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 expected certainty equivalents exactly like those predicted by rank dependent probability weighting functions of the inverse-s shape discussed by Quiggin (1982) and advocated by Tversky and Kahneman (1992), Prelec (1998) and other scholars. Certainty equivalents may not nonparametrically identify preferences: Their conditional expectation (and critically, their interpretation) depends on assumptions concerning the source of their variability.

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