Journal of Risk and Uncertainty

, Volume 2, Issue 3, pp 235–263 | Cite as

Prospective reference theory: Toward an explanation of the paradoxes

  • W Kip Viscusi
Article

Abstract

This article develops a variant of the expected utility model termed prospective reference theory. Although the standard model occurs as a limiting case, the general approach is that individuals treat stated experimental probabilities as imperfect information. This model is applied to a wide variety of aberrant phenomena, including the Allais paradox, the overweighting of low-probability events, the existence of premiums for certain elimination of risks, and the representativeness heuristic. The prospective reference theory model predicts most of the observed behavioral patterns rather than being potentially reconcilable with such phenomena.

Key words

risk expected utility irrationality prospect theory 

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Copyright information

© Kluwer Academic Publishers 1989

Authors and Affiliations

  • W Kip Viscusi
    • 1
  1. 1.Department of EconomicsDuke UniversityDurham

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