Expected utility theory with imprecise probability perception: explaining preference reversals

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JournalApplied Economics Letters
DateAccepted/In press - 14 Sep 2016
DateE-pub ahead of print - 30 Sep 2016
DatePublished (current) - 2017
Issue number13
Volume24
Pages (from-to)906-910
Early online date30/09/16
Original languageEnglish

Abstract

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.

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© 2016, Informa UK Limited, trading as Taylor & Francis Group. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.

    Research areas

  • alpha EU model, anomalies in expected utility theory, decision under risk, imprecise probability perceptions, preference reversals, valuation gaps

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