Probability versus Certainty Equivalence Methods in Utility Measurement: Are They Equivalent?

Probability versus Certainty Equivalence Methods in Utility Measurement: Are They Equivalent?

Certainty equivalence (CE) and probability equivalence (PE) methods are the two most frequently used procedures for constructing von Neumann-Morgenstern utility functions. In this paper, we compare these methods experimentally, using a two-stage within-subject design. By asking subjects first for a...

Ausführliche Beschreibung

Bibliographische Detailangaben
Veröffentlicht in:Management Science. - Institute for Operations Research and the Management Sciences, 1954. - 31(1985), 10, Seite 1213-1231
1. Verfasser: Hershey, John C. (VerfasserIn)
Format: Online-Aufsatz
Sprache:English
Veröffentlicht: 1985
Zugriff auf das übergeordnete Werk:Management Science
Schlagworte:Utility/Preference Theory Estimation Information Processing Heuristics and Biases Framing Economics Behavioral sciences Applied sciences Mathematics
LEADER 01000caa a22002652 4500
001 JST056279701
003 DE-627
005 20240622021949.0
007 cr uuu---uuuuu
008 150324s1985 xx |||||o 00| ||eng c
035 |a (DE-627)JST056279701 
035 |a (JST)2631711 
040 |a DE-627  |b ger  |c DE-627  |e rakwb 
041 |a eng 
100 1 |a Hershey, John C.  |e verfasserin  |4 aut 
245 1 0 |a Probability versus Certainty Equivalence Methods in Utility Measurement: Are They Equivalent? 
264 1 |c 1985 
336 |a Text  |b txt  |2 rdacontent 
337 |a Computermedien  |b c  |2 rdamedia 
338 |a Online-Ressource  |b cr  |2 rdacarrier 
520 |a Certainty equivalence (CE) and probability equivalence (PE) methods are the two most frequently used procedures for constructing von Neumann-Morgenstern utility functions. In this paper, we compare these methods experimentally, using a two-stage within-subject design. By asking subjects first for a CE judgment and later for a related PE judgment (or vice versa), a consistency test is devised which any deterministic expectation model, including those allowing probability transformations, should meet. Using four related experiments, this consistency test is applied separately to gain and loss questions, and to the two sequences of linked equivalence judgments, namely CE-PE and PE-CE. The empirical results reveal serious inconsistencies between the CE and PE responses for each of the four experiments. The extent of discrepancy depends strongly on the subject's initial risk attitude and whether the gain or loss domain is examined. To explain the complex pattern of results, the second part of the paper explores several plausible hypotheses. The first of these concerns the role of random error, in either the responses or the utility function itself. It is shown that both can lead to bias, although not of a type that could explain our results. Thereafter shifts in reference points are examined. A particular reframing of the PE response mode is postulated in which a pure gamble is psychologically translated into a mixed one, leading to increased risk aversion. This hypothesis, which is also supported by other evidence, offers a complete and simple explanation of the results. Finally, several other behavioral hypotheses are examined, after developing a weighted average model to simulate them. They concern anchoring effects, differences in salience between the probability and outcome dimensions, strategic misrepresentation, regret or rejoice influences, and endowment effects. Although each hypothesis predicts some type of bias, none of these five could singly explain the particular pattern of bias observed. In general, the study demonstrates (1) that serious discrepancies exist between the CE and PE methods of utility measurement, (2) that the particular results are incompatible with traditional deterministic choice models, (3) how random response errors, through propagation, can induce systematic biases in the utility function, (4) that reframing of the PE mode offers a simple reference shift explanation of the complex findings, and (5) how various heuristics and biases can be operationalized and simulated to assess their effects on utility measurement. As such, this study represents a further step toward a systematic investigation of response mode biases in utility measurement. 
540 |a Copyright 1985 The Institute of Management Sciences 
650 4 |a Utility/Preference Theory 
650 4 |a Estimation 
650 4 |a Information Processing 
650 4 |a Heuristics and Biases 
650 4 |a Framing 
650 4 |a Economics  |x Economic disciplines  |x Financial economics  |x Finance  |x Financial analysis  |x Risk management  |x Risk aversion 
650 4 |a Behavioral sciences  |x Leisure studies  |x Recreation  |x Games  |x Gambling  |x Lotteries 
650 4 |a Economics  |x Microeconomics  |x Economic utility  |x Utility functions 
650 4 |a Behavioral sciences  |x Psychology  |x Cognitive psychology  |x Emotion  |x Emotional states  |x Ambivalence 
650 4 |a Applied sciences  |x Research methods  |x Modeling 
650 4 |a Mathematics  |x Applied mathematics  |x Analytics  |x Error analysis  |x Random errors 
650 4 |a Behavioral sciences  |x Psychology  |x Cognitive psychology  |x Cognitive processes  |x Decision making  |x Focalism 
650 4 |a Mathematics  |x Applied mathematics  |x Statistics  |x Applied statistics  |x Descriptive statistics  |x Central tendencies  |x Weighted averages 
650 4 |a Mathematics  |x Mathematical objects  |x Mathematical sequences 
650 4 |a Mathematics  |x Pure mathematics  |x Algebra  |x Polynomials  |x Binomials 
655 4 |a research-article 
773 0 8 |i Enthalten in  |t Management Science  |d Institute for Operations Research and the Management Sciences, 1954  |g 31(1985), 10, Seite 1213-1231  |w (DE-627)320623602  |w (DE-600)2023019-9  |x 15265501  |7 nnns 
773 1 8 |g volume:31  |g year:1985  |g number:10  |g pages:1213-1231 
856 4 0 |u https://www.jstor.org/stable/2631711  |3 Volltext 
912 |a GBV_USEFLAG_A 
912 |a SYSFLAG_A 
912 |a GBV_JST 
912 |a GBV_ILN_11 
912 |a GBV_ILN_20 
912 |a GBV_ILN_22 
912 |a GBV_ILN_23 
912 |a GBV_ILN_24 
912 |a GBV_ILN_31 
912 |a GBV_ILN_32 
912 |a GBV_ILN_39 
912 |a GBV_ILN_40 
912 |a GBV_ILN_60 
912 |a GBV_ILN_62 
912 |a GBV_ILN_63 
912 |a GBV_ILN_65 
912 |a GBV_ILN_69 
912 |a GBV_ILN_70 
912 |a GBV_ILN_90 
912 |a GBV_ILN_95 
912 |a GBV_ILN_100 
912 |a GBV_ILN_110 
912 |a GBV_ILN_120 
912 |a GBV_ILN_152 
912 |a GBV_ILN_187 
912 |a GBV_ILN_224 
912 |a GBV_ILN_285 
912 |a GBV_ILN_374 
912 |a GBV_ILN_702 
912 |a GBV_ILN_2001 
912 |a GBV_ILN_2003 
912 |a GBV_ILN_2005 
912 |a GBV_ILN_2006 
912 |a GBV_ILN_2007 
912 |a GBV_ILN_2008 
912 |a GBV_ILN_2009 
912 |a GBV_ILN_2010 
912 |a GBV_ILN_2011 
912 |a GBV_ILN_2014 
912 |a GBV_ILN_2015 
912 |a GBV_ILN_2018 
912 |a GBV_ILN_2020 
912 |a GBV_ILN_2021 
912 |a GBV_ILN_2026 
912 |a GBV_ILN_2027 
912 |a GBV_ILN_2034 
912 |a GBV_ILN_2044 
912 |a GBV_ILN_2048 
912 |a GBV_ILN_2050 
912 |a GBV_ILN_2055 
912 |a GBV_ILN_2056 
912 |a GBV_ILN_2057 
912 |a GBV_ILN_2059 
912 |a GBV_ILN_2061 
912 |a GBV_ILN_2065 
912 |a GBV_ILN_2068 
912 |a GBV_ILN_2106 
912 |a GBV_ILN_2107 
912 |a GBV_ILN_2108 
912 |a GBV_ILN_2111 
912 |a GBV_ILN_2112 
912 |a GBV_ILN_2113 
912 |a GBV_ILN_2118 
912 |a GBV_ILN_2122 
912 |a GBV_ILN_2129 
912 |a GBV_ILN_2143 
912 |a GBV_ILN_2147 
912 |a GBV_ILN_2148 
912 |a GBV_ILN_2152 
912 |a GBV_ILN_2153 
912 |a GBV_ILN_2190 
912 |a GBV_ILN_2232 
912 |a GBV_ILN_2472 
912 |a GBV_ILN_2935 
912 |a GBV_ILN_2940 
912 |a GBV_ILN_2949 
912 |a GBV_ILN_2950 
912 |a GBV_ILN_4012 
912 |a GBV_ILN_4035 
912 |a GBV_ILN_4037 
912 |a GBV_ILN_4046 
912 |a GBV_ILN_4112 
912 |a GBV_ILN_4125 
912 |a GBV_ILN_4126 
912 |a GBV_ILN_4242 
912 |a GBV_ILN_4246 
912 |a GBV_ILN_4249 
912 |a GBV_ILN_4251 
912 |a GBV_ILN_4305 
912 |a GBV_ILN_4306 
912 |a GBV_ILN_4307 
912 |a GBV_ILN_4313 
912 |a GBV_ILN_4322 
912 |a GBV_ILN_4323 
912 |a GBV_ILN_4324 
912 |a GBV_ILN_4325 
912 |a GBV_ILN_4326 
912 |a GBV_ILN_4335 
912 |a GBV_ILN_4338 
912 |a GBV_ILN_4346 
912 |a GBV_ILN_4393 
912 |a GBV_ILN_4700 
951 |a AR 
952 |d 31  |j 1985  |e 10  |h 1213-1231