Reconciling Introspective Utility with Revealed Preference: Experimental Arguments Based on Prospect Theory

Abstract

In an experiment, choice-based utilities are derived from choices under risk, and choiceless utilities from introspective strength-of-preference judgments. The well-known inconsistencies of risky utility, when analyzed through expected utility, are resolved by means of prospect theory. A consistent cardinal utility index for risky choice results. Remarkably, however, this cardinal index agrees well with the choiceless utilities. This finding suggests a relation between a choice-based and a choiceless concept. Such a relation would imply that direct judgments can provide useful data for economics, and can reinforce the revealed-preference approach. Implications for the classical debate on ordinal versus cardinal utility are discussed.This is a preprint of an article to be published in Journal of Econometric