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

  • Andreoni J
  • Sprenger C
  • 56

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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.

Author-supplied keywords

  • allais paradox
  • dynamic inconsistency
  • probability
  • risk aversion
  • uncertainty effect

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Authors

  • James Andreoni

  • Charles Sprenger

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