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Journal of Risk and Uncertainty

, Volume 3, Issue 3, pp 247–259 | Cite as

A “Pseudo-endowment” effect, and its implications for some recent nonexpected utility models

  • Drazen Prelec
Article

Abstract

This article describes a modification of the Allais paradox that induces preferences inconsistent with two conditions weaker than the independence axiom, namely quasi-convexity (a special case of which is the betweenness axom), and Hypothesis II of Machina (also called fanning-out). These violations can be formally derived from prospect theory by invoking a nonliner transformation of probability into decision weight.

Key words

nonexpected utility quasi-convexity Machina's Hypothesis II pseudo-endowment 

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Copyright information

© Kluwer Academic Publishers 1990

Authors and Affiliations

  • Drazen Prelec
    • 1
  1. 1.Graduate School of Business AdministrationHarvard UniversityBoston

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