Abstract
It was established over a decade ago that the certainty equivalence (CE) and probability equivalence (PE) methods for measuring basic risk attitudes yield different results (Hershey, Kunreuther, and Schoemaker, 1982). The typical design used presents subjects with a choice between a sure amount S and a gamble G offering a probability p of a larger payoff and a complementary probability of a smaller payoff. The amount S typically equals the expected value of the gamble. In the CE mode, S is adjusted to some point of indifference. In the PE mode, the probability p used for the gamble is adjusted. The probability equivalence method typically yields greater risk aversion than the certainty equivalence method for both gain and loss gambles. Several explanations have been offered.
We thank Jon Baron, Mark Machina, J. Edward Russo, and Elke Weber for helpful comments.
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© 1994 Springer Science+Business Media Dordrecht
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Schoemaker, P.J.H., Hershey, J.C. (1994). CE-PE Bias and Probability Level: An Anchoring Model of their Interaction. In: Munier, B., Machina, M.J. (eds) Models and Experiments in Risk and Rationality. Theory and Decision Library, vol 29. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-2298-8_3
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DOI: https://doi.org/10.1007/978-94-017-2298-8_3
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