Expected utility theory with imprecise probability perception: explaining preference reversals

Oben Bayrak; John Denis Hey

doi:10.1080/13504851.2016.1240332

Expected utility theory with imprecise probability perception: explaining preference reversals

Oben Bayrak, John Denis Hey

Economics

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	906-910
Journal	Applied Economics Letters
Volume	24
Issue number	13
Early online date	30 Sept 2016
DOIs	https://doi.org/10.1080/13504851.2016.1240332
Publication status	Published - 2017

Bibliographical note

© 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.

Keywords

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

Access to Document

10.1080/13504851.2016.1240332

AEL_manuscript_12
© 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.
Accepted author manuscript, 448 KBLicence: Unspecified

Cite this

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