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Random expected utility and certainty equivalents: mimicry of probability weighting functions

Journal of the Economic Science Association volume 3, pages 161–173 (2017)Cite this article

Abstract

For simple prospects routinely used for certainty equivalent elicitation, random expected utility preferences imply a conditional expectation function that can mimic deterministic rank-dependent preferences. That is, a subject with random expected utility preferences can have expected certainty equivalents exactly like those predicted by rank-dependent probability weighting functions of the inverse-s shape discussed by Quiggin (J Econ Behav Organ 3:323–343, 1982) and advocated by Tversky and Kahneman (J Risk Uncertainty 5:297–323, 1992), Prelec (Econometrica 66:497–527, 1998) and other scholars. Certainty equivalents may not nonparametrically identify preferences: Their conditional expectation (and critically, their interpretation) depends on assumptions concerning the source of their variability.

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Authors and Affiliations

  1. Economic Science Institute, Chapman University, Orange, CA, 92866, USA

    Nathaniel T. Wilcox

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  1. Nathaniel T. Wilcox
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Correspondence to Nathaniel T. Wilcox.

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I am grateful to the Economic Science Institute and Chapman University for their ongoing support. Jose Apesteguia, Mattias Del Campo Axelrod, Miguel A. Ballester, Sudeep Bhatia, Michael Birnbaum, Daniel Cavagnaro, Mark DeSantis, Glenn W. Harrison, Anthony Marley, Kevin Mumford, John P. Nolan and Mark Schneider provided help or commentary, though none are responsible for remaining errors.

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Wilcox, N.T. Random expected utility and certainty equivalents: mimicry of probability weighting functions. J Econ Sci Assoc 3, 161–173 (2017). https://doi.org/10.1007/s40881-017-0042-1

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  • DOI: https://doi.org/10.1007/s40881-017-0042-1

Keywords

  • Certainty equivalence
  • Identification
  • Preference estimation
  • Preference measurement
  • Random preference
  • Choice under risk and uncertainty

JEL Classification

  • C81
  • C91
  • D81