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Journal of risk and uncertainty, 2007-06, Vol.34 (3), p.259-286
Ort / Verlag
New York: New York : Kluwer Academic Publishers-Plenum Publishers
Erscheinungsjahr
2007
Quelle
Business Source Ultimate【Trial: -2024/12/31】【Remote access available】
Beschreibungen/Notizen
This paper proposes a new decision theory of how individuals make random errors when they compute the expected utility of risky lotteries. When distorted by errors, the expected utility of a lottery never exceeds (falls below) the utility of the highest (lowest) outcome. This assumption implies that errors are likely to overvalue (undervalue) lotteries with expected utility close to the utility of the lowest (highest) outcome. Proposed theory explains many stylized empirical facts such as the fourfold pattern of risk attitudes, common consequence effect (Allais paradox), common ratio effect and violations of betweenness. Theory fits the data from ten well-known experimental studies at least as well as cumulative prospect theory.