Filtering Risk Effect in Standard-Gamble Utility Measurement
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Cardinal utility functions measured via the midpoint-sequence expected utility (MSEU) method have often been found incoherent because of the risk effect — that part of an individual’s risk attitude which is inadmissible within the expected utility theory. In order to filter the risk effect, we propose a midpoint-sequence weighted-utility (MSWU) method. It employs a one-parameter utility model suggested by Professor Ole Hagen some two decades ago as a parsimonious descriptor of preferences for two-outcome even-chance gambles. The empirical evidence in support of the model is recounted, but a direct validation of the MSWU method awaits further research.
KeywordsUtility Function Risk Attitude Risk Effect Expected Utility Theory Certainty Equivalent
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