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Performance of the similarity hypothesis relative to existing models of risky choice

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Abstract

Experimental studies have discovered behavior that is inconsistent with the expected utility model (EU) of risky choice (von Neumann and Morgenstern, 1953). The two approaches to address these paradoxes are tested: generalized expected utility models (GEU) and models incorporating decision-making limits or costs through question similarity. Tests are carried out over risky pairs related to well-known examples from Kahneman and Tversky's (1979) influential work. Statistical analysis reveals that GEU models of choice are significantly violated for choice patterns consistent with the similarity hypothesis. Additional tests point to shortcomings in the similarity approach that are consistent with fanning out behavior.

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Authors and Affiliations

  1. Department of Agricultural Economics and Economics, Montana State University, 306 Linfield Hall, 59717-0292, Bozeman, MT

    David Buschena

  2. Department of Agricultural and Resource Economics, University of California at Berkeley, 207 Giannini Hall, 94720, Berkeley, CA

    David Zilberman

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  1. David Buschena
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  2. David Zilberman
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Buschena, D., Zilberman, D. Performance of the similarity hypothesis relative to existing models of risky choice. J Risk Uncertainty 11, 233–262 (1995). https://doi.org/10.1007/BF01207788

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