Certain and uncertain utility: The allais paradox and five decision theory phenomena

Abstract

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. Us- ing existing parameter estimates for certain and uncertain utility, ve important decision theory phenomena are discussed: the certainty e ect, experimentally observed probability weighting, the uncertainty e ect, extreme experimental risk aversion and quasi-hyperbolic discounting. All ve phenomena can be resolved.