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2016 | nr 16 | 36
Tytuł artykułu

When 0 + ⅓ + ⅓ > ⅔, but 0 + 0 + ⅓ < ⅓. How the median outcome impacts lottery valuation?

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This paper presents the results of two experiments that exhibit monotonicity violations: some lotteries with three equally likely outcomes are valued more than a superior two-outcome lottery, while others are valued less than an inferior two-outcome lottery. Moreover, the experimental data provide compelling evidence that lottery valuation strongly depends on the value( s) of the middle outcome(s). This contradicts the claim of Cumulative Prospect Theory (CPT) that middle outcomes are assigned lower weights than the extreme ones. Both effects can be observed in the case of four-outcome lotteries. The patterns are persistent for various payoff schedules, and have been observed for subjects from both Poland and California. Incorporating the median outcome value into any modeling of risky decision-making enables these effects to be explained. This paper demonstrates that a simple weighted Expected Utility - Median model describes data involving two- three-, and four-outcome lotteries more accurately than CPT. Moreover, it offers an alternative explanation of "overweighting" of small probabilities, and "underweighting" of large ones - phenomena postulated by CPT. (original abstract)
Opis fizyczny
  • Warsaw School of Economics, Poland
  • California State University, Fullerton. USA
  • Birnbaum, M. H., Beeghley, D. (1997). Violations of Branch Independence in Judgments of the Value of Gambles. "Psychological Science", 8, 87-94.
  • Birnbaum, M. H., Veira, R. (1998). Configural Weighting in Judgments of Two- and Four Outcome Gambles. "Journal of Experimental Psychology: Human Perception and Performance", 24(1), 216-226.
  • Birnbaum, M. H. (2008). New paradoxes of risky decision making. "Psychological Review", 115, 463-501.
  • Von Neumann, J., Morgenstern, O. (1944). Theory of Games and Economic Behavior. Princeton University Press.
  • Prelec, D. (1998). The Probability Weighting Function. "Econometrica", 66, 497-527.
  • Tversky, A., Kahneman, D. (1992). Advances in Prospect Theory: Cumulative Representation of Uncertainty. "Journal of Risk and Uncertainty", 5: 297-323.
  • Viscusi, K. (1989). Prospective Reference Theory: Toward an Explanation of the Paradoxes. "Journal of Risk and Uncertainty", 2, 235-264.
  • Wilcox, R. (2011). Modern Statistics for the Social and Behavioral Sciences: A Practical Introduction. CRC Press.
  • Wilcox, R. (2012). Introduction to Robust Estimation and Hypothesis Testing. Elsevier.
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