Expected utility theory with imprecise probability perception: explaining preference reversals

This article presents a new model for decision-making under risk, which provides an explanation for empirically-observed preference reversals. Central to the theory is the incorporation of probability perception imprecision, which arises because of individuals' vague understanding of numerical...

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Bibliographic Details
Published inApplied economics letters Vol. 24; no. 13; pp. 906 - 910
Main Authors Bayrak, Oben K., Hey, John D.
Format Journal Article
LanguageEnglish
Published London Routledge 29.07.2017
Taylor & Francis LLC
Subjects
Alpha EU model
anomalies in expected utility theory
decision under risk
Economic analysis
Economic models
Expected utility
imprecise probability perceptions
preference reversals valuation gaps
Probability
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Summary:This article presents a new model for decision-making under risk, which provides an explanation for empirically-observed preference reversals. Central to the theory is the incorporation of probability perception imprecision, which arises because of individuals' vague understanding of numerical probabilities. We combine this concept with the use of the Alpha EU model and construct a simple model which helps us to understand anomalies, such as preference reversals and valuation gaps, discovered in the experimental economics literature, that standard models cannot explain.
Bibliography:SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 14
ISSN:1350-4851
1466-4291
DOI:10.1080/13504851.2016.1240332