Skip to main content

An Empirical Investigation of the Assumptions of Risk-Value Models

Abstract

Do participants make decisions consistent with risk-value tradeoffs? One hundred and five undergraduate business students made risk and preference judgments about lottery pairs in a series of paper surveys. The data indicate that the participants’ responses were generally consistent with the key assumptions of risk-value models, but that some extensions of the theory would improve this consistency. In particular, we find that modifying the risk assumptions of the risk-value theory so they are consistent the concept of the reflection of the risk attitude in the domains of gains and losses increases the agreement between the theory and the participants’ responses.

This is a preview of subscription content, access via your institution.

References

  • Allais, M. (1953). “Le comportement de l’homme rationnel devant le risque, critique des postulats et axiomes de l’ecole americaine,” Econometrica 21, 503–546.

    Google Scholar 

  • Allais, M. (1979). “The Foundations of a Positive Theory of Choice Involving Risk and a Criticism of the Postulates and Axioms of the American School.” In M. Allais and O. Hagen (eds.), Expected Utility Hypotheses and the Allais Paradox, pp.~27–145. Holland, Dordrecht: D. Reidel.

    Google Scholar 

  • Arrow, K.J. (1971). Essays in the Theory of Risk Bearing. Chicago, IL: Markham.

    Google Scholar 

  • Bell, D.E. (1985). “Disappointment in Decision Making Under Uncertainty,” Operations Research 33, 1–27.

    Google Scholar 

  • Bell, D.E. (1995). “Risk, Return, and Utility,” Management Science 41, 23–30.

    Google Scholar 

  • Camerer, C. (1995). “Individual Decision Making.” In J.H. Kagel and A.E. Roth (eds.), Handbook of Experimental Economics, pp. 587–683. Princeton, NJ: Princeton University Press.

    Google Scholar 

  • Coombs, C.H. (1975). “Portfolio Theory and the Measurement of Risk.” In M.F. Kaplan and S. Schwartz (eds.), Human Judgment and Decision Processes, pp. 63–85. New York: Academic Press, Inc.

    Google Scholar 

  • Coombs, C.H. and P.E. Lehner. (1981). “An Evaluation of Two Alternative Models for a Theory of Risk: Part 1.” Journal of Experimental Psychology, Human Perception and Performance 7, 1110–1123.

    Google Scholar 

  • Coombs, C.H. and P.E. Lehner. (1984). “Conjoint Design and Analysis of the Bilinear Model: An Application to Judgments of Risk,” Journal of Mathematical Psychology 28, 1–42.

    Google Scholar 

  • Edwards, W. (1954). “The Reliability of Probability-Preferences,” American Journal of Psychology 68, 68–95.

    Google Scholar 

  • Fishburn, P.C. and R.L. Keeney. (1975). “Generalized Utility Independence and Some Implications,” Operations Research 23, 928–940.

    Google Scholar 

  • Harless, D.W. and C.F. Camerer. (1994). “The Predictive Utility of Generalized Expected Utility Theories,” Econometrica 62, 1251–1289.

    Google Scholar 

  • Holt, C.A. and S.K. Laury. (2002). “Risk Aversion and Incentive Effects,” American Economic Review 92, 1644–1655.

    Google Scholar 

  • Jia, J. (1995). “Measures of Risk and Risk-Value Theory.” Ph.D. Dissertation, University of Texas at Austin, TX unpublished.

  • Jia, J. and J.S. Dyer. (1996). “A Standard Measure of Risk and Risk-Value Models,” Management Science 42, 1961–1705.

    Google Scholar 

  • Jia, J. and J.S. Dyer. (2001). “Risk-Value Theory.” Working Paper, Graduate School of Business, University of Texas at Austin, TX.

    Google Scholar 

  • Jia, J., J.S. Dyer, and J.C. Butler. (1999). “Measures of Perceived Risk,” Management Science 45, 519–532.

    Google Scholar 

  • Jia, J., J.S. Dyer, and J.C. Butler. (2001). “Generalized Disappointment Models,” Journal of Risk and Uncertainty 22, 59–78.

    Google Scholar 

  • Kahneman, D.H. and A. Tversky. (1979). “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47, 263–290.

    Google Scholar 

  • Keeney, R.L. and H. Raiffa. (1976). Decisions with Multiple Objectives: Preferences and Value Tradeoffs. New York: Wiley.

    Google Scholar 

  • Keller, L.R., R.K. Sarin, and M. Weber. (1986). “Empirical Investigation of Some Properties of the Perceived Riskiness of Gambles,” Organizational Behavior and Human Decision Processes 38, 114–130.

    Google Scholar 

  • Levy, H. and M. Levy (2002a). “Experimental Tests of the Prospect Theory Value Function: A Stochastic Dominance Approach,” Organizational Behavior and Human Decision Processes 89, 1058–1081.

    Google Scholar 

  • Levy, H. and M. Levy (2002b). “Prospect Theory: Much Ado About Nothing?” Management Science 48, 1338–1349.

    Google Scholar 

  • Loomes, G. and R. Sugden. (1986). “Disappointment and Dynamic Consistency in Choice Under Uncertainty,” Review of Economic Studies LIII, 271–282.

    Google Scholar 

  • Lopes, L.L. (1984). “Risk and Distributional Inequality,” Journal of Experimental Psychology: Human Perception and Performance 10, 465–485.

    Google Scholar 

  • Luce, R.D. and E.U. Weber. (1986). “An Axiomatic Theory of Conjoint, Expected Risk,” Journal of Mathematical Psychology 30, 188–205.

    Google Scholar 

  • Markowitz, H. (1959), Portfolio Selection: Efficient Diversification of Investments. New York: John Wiley {&} Sons.

    Google Scholar 

  • Payne, J.W., D.J. Laughhunn, and R. Crum. (1980). “Translation of Gambles and Aspiration Level Effects in Risky Choice Behavior,” Management Science 26, 1039–1060.

    Google Scholar 

  • Payne, J.W., D.J. Laughhunn, and R. Crum. (1981). “Further Tests of Aspiration Level Effects in Risky Choice Behavior,” Management Science 27, 953–958.

    Google Scholar 

  • Pollatsek, A. and A. Tversky. (1970). “A Theory of Risk,” Journal of Mathematical Psychology 7, 540–553.

    Google Scholar 

  • Pratt, J.W. (1964). “Risk Aversion in the Small and in the Large,” Econometrica 32, 122–136.

    Google Scholar 

  • Rotar, I.V. and A.G. Sholomitsky. (1994). “On the Pollatsek-Tversky Theorem on Risk,” Journal of Mathematical Psychology 38, 322–334.

    Google Scholar 

  • Sarin, R.K. and M. Weber. (1993). Risk-Value Models,” European Journal of Operational Research 70, 135–149.

    Google Scholar 

  • von Neumann, J. and O. Morgenstern. (1947). “Theory of Games and Economic Behavior. Princeton, NJ: Princeton University Press.

    Google Scholar 

  • Wakker, P.P. (2003). The data of Levy and Levy (2002) “Prospect Theory: Much Ado About Nothing?” Actually Support Prospect Theory,” Management Science 49, 979–981.

    Google Scholar 

  • Weber, E.U. and W.P. Bottom. (1989). “Axiomatic Measures of Perceived Risk: Some Tests and Extensions,” Journal of Behavioral Decision Making 2, 113–131.

    Google Scholar 

  • Weber, E.U. and W.P. Bottom. (1990). “An Empirical Evaluation of the Transitivity, Monotonicity, Accounting, and Conjoint Axioms for Perceived Risk,” Organizational Behavior and Human Decision Process 45, 253–275.

    Google Scholar 

  • Weber, E.U. and C. Hsee. (1998). “Cross Cultural Differences in Risk Perception, but Cross Cultural Similarities in Attitudes Toward Perceived Risk,” Management Science 44, 1205–1217.

    Google Scholar 

  • Weber, E.U. and R.A. Milliman. (1997). “Perceived Risk Attitudes: Relating Risk Perception to Risky Choice,” Management Science 43, 123–144.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to James S. Dyer.

Additional information

This research was supported by the National Science Foundation of the U.S. (Grant No. SES-98-19354) and the Research Grants Council of Hong Kong (Grant No. CUHK 4098/98H).

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Butler, J.C., Dyer, J.S. & Jia, J. An Empirical Investigation of the Assumptions of Risk-Value Models. J Risk Uncertainty 30, 133–156 (2005). https://doi.org/10.1007/s11166-005-6562-8

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11166-005-6562-8

Keywords

  • risk measures
  • risk-value models
  • utility theory