An experimental evaluation of the descriptive validity of lottery-dependent utility theory

This article compares the performance of the expected utility (EU) and lottery-dependent expected utility (LDEU) models in predicting the actual choices of experimental subjects among risky options. In the process, we present two approaches for calibrating the LDEU model for an individual decision maker. The results indicate that while LDEU exhibits a higher potential for correctly predicting choice, the version of the model calibrated by indifference judgments does not outperform EU. We suggest a functional form for the parametric functions that defines the LDEU model, and discuss ways in which this function can be incorporated into choice-based assessment approaches to improve predictions.This research was supported in part by the Business Associates Fund at the Fuqua School of Business, Duke University.