Estimation of Expected Utility and Non-Expected Utility Preference Functionals Using Complete Ranking Data

Abstract

In recent years, there have been many empirical investigations into various alternative models of decision making under risk. Most of them have been experimental tests of the predictions (or the axioms) of the various theories — experiments testing the empirical validity of the various new theories against each other and against Expected Utility Theory (EU). In contrast, a number of recent experiments have followed the alternative route of estimating preference functionals, to discover whether the more general preference functionals explain observed behaviour significantly better than the less general functionals. The experiment discussed in this paper belongs to the second group of experiments and follows two previous experiments (Hey and Di Cagno (1990), Hey and Orme (1992)), which estimated the preference functionals implied by several competing models. The first of these, Hey and Di Cagno (1990), reported on an experiment in which 68 subjects were asked 60 pairwise preference questions involving random prospects from four Marschak-Machina Triangles (see Machina 1987).

The authors are grateful to Colin Camerer, Mark Machina, Paul Shoemaker, Barry Sopher and other participants at the FUR VI Conference for helpful comments. Our thanks also to the Leverhulme Trust for generously providing the finance to pay the subjects who took part in this experiment.