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2010a): “Certain and Uncertain Utility: The Allais Paradox and Five Decision Theory Phenomena

By James Andreoni, Charles Sprenger, Muriel Niederle, William Nielson, Matthew Rabin, Joel Sobel, Ulrich Schmidt and Lise Vesterlund


In the study of decision making under risk, preferences are assumed to be continuous. We present a model of discontinuous preferences over certain and uncertain outcomes. Using existing parameter estimates for certain and uncertain utility, five important decision theory phenomena are discussed: the certainty effect, experimentally observed probability weighting, the uncertainty effect, extreme experimental risk aversion and quasi-hyperbolic discounting. All five phenomena can be resolved. JEL classification

Topics: Allais Paradox, dynamic inconsistency, risk aversion, uncertainty effect, probability
Year: 2013
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